Plaisio Computers SA. (ATSE:PLAIS) is currently trading at a trailing P/E of 22.9x, which is higher than the industry average of 18.5x. While this makes PLAIS appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Plaisio Computers
Breaking down the Price-Earnings 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 PLAIS
Price-Earnings Ratio = Price per share ÷ Earnings per share
PLAIS Price-Earnings Ratio = €4.3 ÷ €0.188 = 22.9x
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 PLAIS, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 22.9x, PLAIS’s P/E is higher than its industry peers (18.5x). This implies that investors are overvaluing each dollar of PLAIS’s earnings. As such, our analysis shows that PLAIS represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your PLAIS shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PLAIS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PLAIS, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PLAIS to are fairly valued by the market. If this does not hold true, PLAIS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.