TINC Comm VA (ENXTBR:TINC) is currently trading at a trailing P/E of 13.9x, which is higher than the industry average of 8.6x. While TINC 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for TINC Comm. VA
Breaking down the Price-Earnings 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 dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for TINC
Price per share = €11.8
Earnings per share = €0.848
∴ Price-Earnings Ratio = €11.8 ÷ €0.848 = 13.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TINC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use below. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
Since TINC’s P/E of 13.9x is higher than its industry peers (8.6x), it means that investors are paying more than they should for each dollar of TINC’s earnings. As such, our analysis shows that TINC represents an over-priced stock.
A few caveats
However, before you rush out to sell your TINC shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to TINC. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with TINC, then TINC’s P/E would naturally be higher since investors would reward TINC’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with TINC, TINC’s P/E would again be higher since investors would reward TINC’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing TINC to are fairly valued by the market. If this assumption does not hold true, TINC’s higher P/E ratio may be because firms in our peer group are being undervalued 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 TINC. 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:
- Financial Health: Is TINC’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has TINC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TINC’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.