Com Hem Holding AB (publ) (OM:COMH) trades with a trailing P/E of 53.9x, which is higher than the industry average of 18x. While COMH might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Com Hem Holding

Breaking down the P/E ratio

P/E is a popular ratio used for 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 COMH

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

COMH Price-Earnings Ratio = SEK137.2 ÷ SEK2.544 = 53.9x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to COMH, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. COMH’s P/E of 53.9x is higher than its industry peers (18x), which implies that each dollar of COMH’s earnings is being overvalued by investors. Therefore, according to this analysis, COMH is an over-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to sell your COMH shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to COMH, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with COMH, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing COMH to are fairly valued by the market. If this does not hold, there is a possibility that COMH’s P/E is lower because our peer group is 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.