Should You Be Tempted To Sell Jyske Bank A/S (CPH:JYSK) Because Of Its PE Ratio?

September 11, 2018
  •  Updated
September 29, 2022
CPSE:JYSK
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This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.

Jyske Bank A/S (CPH:JYSK) is trading with a trailing P/E of 9.8, which is higher than the industry average of 7.6. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what other factors to keep in mind.

Check out our latest analysis for Jyske Bank

What you need to know about the P/E ratio

CPSE:JYSK PE PEG Gauge September 11th 18
CPSE:JYSK PE PEG Gauge September 11th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 JYSK

Price per share = DKK321.9

Earnings per share = DKK32.88

∴ Price-Earnings Ratio = DKK321.9 ÷ DKK32.88 = 9.8x

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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to JYSK, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll 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.

Since JYSK's P/E of 9.8 is higher than its industry peers (7.6), it means that investors are paying more for each dollar of JYSK's earnings. This multiple is a median of profitable companies of 22 Banks companies in DK including Totalbanken, Skjern Bank and P/F BankNordik. You could also say that the market is suggesting that JYSK has a stronger business than the average comparable company.

A few caveats

However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to JYSK. If not, the difference in P/E might be a result of other factors. For example, if Jyske Bank A/S is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to JYSK may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.

CPSE:JYSK Future Profit September 11th 18
CPSE:JYSK Future Profit September 11th 18

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 JYSK. 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:

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

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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.

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