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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.
Dierig Holding AG (FRA:DIE) is trading with a trailing P/E of 22.5, which is close to the industry average of 23.2. While DIE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Dierig Holding
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 DIE
Price-Earnings Ratio = Price per share ÷ Earnings per share
DIE Price-Earnings Ratio = €15.2 ÷ €0.675 = 22.5x
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 DIE, 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. Dierig Holding AG (FRA:DIE) trades on a trailing P/E of 22.5. This isn’t too far from the industry average (which is 23.2). This multiple is a median of profitable companies of 7 Luxury companies in DE including Hoftex Group, Bijou Brigitte modische Accessoires and Hugo Boss. You can think of it like this: the market is suggesting that DIE has similar prospects to its peers in the same industry.
Assumptions to watch out for
However, 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 DIE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with DIE, 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 DIE to are fairly valued by the market. If this does not hold true, DIE’s lower P/E ratio may be because firms in our peer group are overvalued by the market.