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FI.L.A. – Fabbrica Italiana Lapis ed Affini S.p.A. (BIT:FILA) is trading with a trailing P/E of 50.7x, which is higher than the industry average of 13.8x. 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. 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 F.I.L.A. – Fabbrica Italiana Lapis ed Affini
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 FILA
Price-Earnings Ratio = Price per share ÷ Earnings per share
FILA Price-Earnings Ratio = €17.3 ÷ €0.341 = 50.7x
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 FILA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since FILA’s P/E of 50.7x is higher than its industry peers (13.8x), it means that investors are paying more than they should for each dollar of FILA’s earnings. As such, our analysis shows that FILA represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your FILA shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to FILA. 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 FILA, 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 FILA to are fairly valued by the market. If this does not hold, there is a possibility that FILA’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
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 FILA. 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. 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: