Ahlers AG (DB:AAH) is currently trading at a trailing P/E of 32.2x, which is higher than the industry average of 23.6x. While this makes AAH appear like a stock to avoid or sell if you own it, 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. See our latest analysis for Ahlers

Breaking down the Price-Earnings ratio

The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for AAH

Price-Earnings Ratio = Price per share ÷ Earnings per share

AAH Price-Earnings Ratio = €5.5 ÷ €0.171 = 32.2x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AAH, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 32.2x, AAH’s P/E is higher than its industry peers (23.6x). This implies that investors are overvaluing each dollar of AAH’s earnings. Therefore, according to this analysis, AAH is an over-priced stock.

A few caveats

However, before you rush out to sell your AAH shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AAH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AAH, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing AAH to are fairly valued by the market. If this is violated, AAH’s P/E may be lower than its peers as they are actually overvalued by investors.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.