Edmond de Rothschild (Suisse) SA. (SWX:RLD) is trading with a trailing P/E of 30.5x, which is higher than the industry average of 19.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. 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 Edmond de Rothschild (Suisse)
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 RLD
Price-Earnings Ratio = Price per share ÷ Earnings per share
RLD Price-Earnings Ratio = CHF17900 ÷ CHF587.788 = 30.5x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as RLD, 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. RLD’s P/E of 30.5x is higher than its industry peers (19.6x), which implies that each dollar of RLD’s earnings is being overvalued by investors. As such, our analysis shows that RLD represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your RLD shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RLD. 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 RLD, 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 RLD to are fairly valued by the market. If this is violated, RLD’s P/E may be lower than its peers as they are actually overvalued by investors.
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.