Panalpina Welttransport (Holding) AG (SWX:PWTN) trades with a trailing P/E of 47.2x, which is higher than the industry average of 15.7x. 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. View our latest analysis for Panalpina Welttransport (Holding)
Breaking down 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 PWTN
Price-Earnings Ratio = Price per share ÷ Earnings per share
PWTN Price-Earnings Ratio = CHF125.1 ÷ CHF2.651 = 47.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PWTN, 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. Since PWTN’s P/E of 47.2x is higher than its industry peers (15.7x), it means that investors are paying more than they should for each dollar of PWTN’s earnings. As such, our analysis shows that PWTN represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your PWTN shares, 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 PWTN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with PWTN, 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 PWTN to are fairly valued by the market. If this does not hold, there is a possibility that PWTN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on PWTN, 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 urge you to complete your research by taking a look at the following: