Concurrent Technologies plc (AIM:CNC) trades with a trailing P/E of 22.3x, which is higher than the industry average of 20.9x. While this makes CNC 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Concurrent Technologies
Breaking down 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 pound of the company’s earnings.
P/E Calculation for CNC
Price-Earnings Ratio = Price per share ÷ Earnings per share
CNC Price-Earnings Ratio = 0.81 ÷ 0.036 = 22.3x
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 CNC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 22.3x, CNC’s P/E is higher than its industry peers (20.9x). This implies that investors are overvaluing each dollar of CNC’s earnings. Therefore, according to this analysis, CNC is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your CNC shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to CNC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with CNC, 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 CNC to are fairly valued by the market. If this is violated, CNC's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CNC. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If CNC has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.