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Flughafen Wien Aktiengesellschaft (WBAG:FLU) is trading with a trailing P/E of 24.3x, which is higher than the industry average of 20x. While this makes FLU 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Flughafen Wien
Breaking down the Price-Earnings 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 FLU
Price-Earnings Ratio = Price per share ÷ Earnings per share
FLU Price-Earnings Ratio = €33.35 ÷ €1.37 = 24.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FLU, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. FLU’s P/E of 24.3x is higher than its industry peers (20x), which implies that each dollar of FLU’s earnings is being overvalued by investors. Therefore, according to this analysis, FLU is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your FLU shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FLU, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FLU, 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 FLU to are fairly valued by the market. If this does not hold true, FLU’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.