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 begin learning the link between Getlink SE (EPA:GET)’s fundamentals and stock market performance.
Getlink SE (EPA:GET) trades with a trailing P/E of 59.5x, which is higher than the industry average of 18.6x. 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Getlink
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 GET
Price per share = €12.01
Earnings per share = €0.202
∴ Price-Earnings Ratio = €12.01 ÷ €0.202 = 59.5x
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 GET, 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 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 GET’s P/E of 59.5x is higher than its industry peers (18.6x), it means that investors are paying more than they should for each dollar of GET’s earnings. Therefore, according to this analysis, GET is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your GET shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to GET. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you are inadvertently comparing riskier firms with GET, then GET’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with GET. In this case, GET’s P/E would be higher since investors would also reward GET’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GET to are fairly valued by the market. If this assumption does not hold true, GET’s higher P/E ratio may be because firms in our peer group are being undervalued by the market.
What this means for you:
Since you may have already conducted your due diligence on GET, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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:
- Future Outlook: What are well-informed industry analysts predicting for GET’s future growth? Take a look at our free research report of analyst consensus for GET’s outlook.
- Past Track Record: Has GET 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 GET’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.