Should You Be Tempted To Sell Comet Holding AG (SWX:COTN) Because Of Its PE Ratio?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Comet Holding AG (SWX:COTN).

Comet Holding AG (SWX:COTN) is trading with a trailing P/E of 25.8x, which is higher than the industry average of 25.7x. While COTN 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Comet Holding

What you need to know about 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 dollar of the company’s earnings.

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as COTN, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 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.

At 25.8x, COTN’s P/E is higher than its industry peers (25.7x). This implies that investors are overvaluing each dollar of COTN’s earnings. Therefore, according to this analysis, COTN is an over-priced stock.

Assumptions to be aware of

However, before you rush out to sell your COTN shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to COTN. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with COTN, then COTN’s P/E would naturally be higher since investors would reward COTN’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with COTN, COTN’s P/E would again be higher since investors would reward COTN’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing COTN to are fairly valued by the market. If this does not hold, there is a possibility that COTN’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in COTN. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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:

1. Future Outlook: What are well-informed industry analysts predicting for COTN’s future growth? Take a look at our free research report of analyst consensus for COTN’s outlook.
2. Past Track Record: Has COTN 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 COTN's historicals for more clarity.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.