Münchener Tierpark Hellabrunn AG (MUN:MTP) is currently trading at a trailing P/E of 66.8x, which is higher than the industry average of 21.6x. While this makes MTP 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Münchener Tierpark Hellabrunn
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 MTP
Price per share = €290
Earnings per share = €4.341
∴ Price-Earnings Ratio = €290 ÷ €4.341 = 66.8x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 MTP, such as capital structure and profitability. 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.
MTP’s P/E of 66.8x is higher than its industry peers (21.6x), which implies that each dollar of MTP’s earnings is being overvalued by investors. As such, our analysis shows that MTP represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your MTP shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to MTP. 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 MTP, then MTP’s P/E would naturally be higher since investors would reward MTP’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with MTP, MTP’s P/E would again be higher since investors would reward MTP’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing MTP to are fairly valued by the market. If this assumption does not hold true, MTP’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 MTP. 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 urge you to complete your research by taking a look at the following:
- Financial Health: Is MTP’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 MTP 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 MTP’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.