In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
pferdewettende AG (FRA:EMH1) is currently trading at a trailing P/E of 19.8, which is higher than the industry average of 16.3. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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 pferdewetten.de
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 EMH1
Price-Earnings Ratio = Price per share ÷ Earnings per share
EMH1 Price-Earnings Ratio = €10.25 ÷ €0.517 = 19.8x
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 EMH1, 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. At 19.8, EMH1’s P/E is higher than its industry peers (16.3). This implies that investors are overvaluing each dollar of EMH1’s earnings. This multiple is a median of profitable companies of 10 Hospitality companies in DE including IFA Hotel & Touristik, ZEAL Network and TUI. You could also say that the market is suggesting that EMH1 is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to EMH1. If not, the difference in P/E might be a result of other factors. For example, pferdewettende AG could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to EMH1 may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.