In This Article:
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
CVS Group plc (LON:CVSG) trades with a trailing P/E of 50.8, which is higher than the industry average of 25.3. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for CVS Group
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CVSG
Price-Earnings Ratio = Price per share ÷ Earnings per share
CVSG Price-Earnings Ratio = £8.2 ÷ £0.161 = 50.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CVSG, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CVSG’s P/E of 50.8 is higher than its industry peers (25.3), which implies that each dollar of CVSG’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 9 Healthcare companies in GB including Ashley House, Totally and CareTech Holdings. You could also say that the market is suggesting that CVSG is a stronger business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to CVSG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if CVS Group plc is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to CVSG may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CVSG. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: