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Global Dominion Access SA. (BME:DOM) trades with a trailing P/E of 28.8x, which is higher than the industry average of 23x. While DOM 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Global Dominion Access
Breaking down the P/E ratio
P/E is a popular ratio used for 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 DOM
Price-Earnings Ratio = Price per share ÷ Earnings per share
DOM Price-Earnings Ratio = €4.43 ÷ €0.154 = 28.8x
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 DOM, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 28.8x, DOM’s P/E is higher than its industry peers (23x). This implies that investors are overvaluing each dollar of DOM’s earnings. Therefore, according to this analysis, DOM is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your DOM shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to DOM. 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 DOM, 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 DOM to are fairly valued by the market. If this does not hold, there is a possibility that DOM’s P/E is lower because our peer group is 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.