In This Article:
CapMan Oyj (HLSE:CAPMAN) is trading with a trailing P/E of 24x, which is higher than the industry average of 20.6x. While CAPMAN might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 CapMan Oyj
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 CAPMAN
Price-Earnings Ratio = Price per share ÷ Earnings per share
CAPMAN Price-Earnings Ratio = €1.56 ÷ €0.065 = 24x
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 CAPMAN, 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 CAPMAN’s P/E of 24x is higher than its industry peers (20.6x), it means that investors are paying more than they should for each dollar of CAPMAN’s earnings. Therefore, according to this analysis, CAPMAN is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your CAPMAN shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CAPMAN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CAPMAN, 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 CAPMAN to are fairly valued by the market. If this does not hold true, CAPMAN’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CAPMAN, 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: