Brouwerij Handelsmaatschappij NV (ENXTBR:COBH) is currently trading at a trailing P/E of 44.3x, which is higher than the industry average of 24.8x. While this makes COBH 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Brouwerij Handelsmaatschappij

What you need to know about 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 COBH

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

COBH Price-Earnings Ratio = €4000 ÷ €90.227 = 44.3x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as COBH, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since COBH’s P/E of 44.3x is higher than its industry peers (24.8x), it means that investors are paying more than they should for each dollar of COBH’s earnings. As such, our analysis shows that COBH represents an over-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to sell your COBH shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to COBH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with COBH, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing COBH to are fairly valued by the market. If this does not hold true, COBH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

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.