In This Article:
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Thermador Groupe SA (EPA:THEP) is currently trading at a trailing P/E of 15.5x, which is lower than the industry average of 23.1x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Thermador Groupe
Demystifying 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 THEP
Price-Earnings Ratio = Price per share ÷ Earnings per share
THEP Price-Earnings Ratio = €49.5 ÷ €3.185 = 15.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 THEP, 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 15.5, THEP’s P/E is lower than its industry peers (23.1). This implies that investors are undervaluing each dollar of THEP’s earnings. This multiple is a median of profitable companies of 5 Trade Distributors companies in FR including UPERGY Société Anonyme, Jacquet Metal Service and Herige. You can think of it like this: the market is suggesting that THEP is a weaker business than the average comparable company.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to THEP, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with THEP, 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 THEP to are fairly valued by the market. If this is violated, THEP’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to THEP. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following: