This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Horus AG (BST:HRU)’s fundamentals and stock market performance.
Horus AG (BST:HRU) is trading with a trailing P/E of 29.7x, which is higher than the industry average of 15.1x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Horus
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for HRU
Price per share = €2.06
Earnings per share = €0.0693
∴ Price-Earnings Ratio = €2.06 ÷ €0.0693 = 29.7x
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. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as HRU, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since HRU’s P/E of 29.7x is higher than its industry peers (15.1x), it means that investors are paying more than they should for each dollar of HRU’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in DE including Solvesta, Mejority Capital and Mic. Therefore, according to this analysis, HRU is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your HRU 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 HRU. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with HRU, then investors would naturally value HRU at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with HRU, investors would also value HRU at a higher price since it is a higher growth investment. Both scenarios would explain why HRU has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing HRU to are fairly valued by the market. If this does not hold, there is a possibility that HRU’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 HRU. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for HRU’s future growth? Take a look at our free research report of analyst consensus for HRU’s outlook.
- Past Track Record: Has HRU 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 HRU’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.