Nebelhornbahn-Aktiengesellschaft (MUN:NHB) is trading with a trailing P/E of 41.7x, which is higher than the industry average of 20.8x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Nebelhornbahn-Aktiengesellschaft
Breaking down the P/E 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 NHB
Price-Earnings Ratio = Price per share ÷ Earnings per share
NHB Price-Earnings Ratio = €33.4 ÷ €0.801 = 41.7x
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 NHB, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. NHB’s P/E of 41.7x is higher than its industry peers (20.8x), which implies that each dollar of NHB’s earnings is being overvalued by investors. Therefore, according to this analysis, NHB is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your NHB shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to NHB, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with NHB, 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 NHB to are fairly valued by the market. If this is violated, NHB’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on NHB, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 highly recommend you to complete your research by taking a look at the following: