Getlink SE. (ENXTPA:GET) is currently trading at a trailing P/E of 58.3x, which is higher than the industry average of 19.2x. While this makes GET 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Getlink
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief 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 GET
Price per share = €11.78
Earnings per share = €0.202
∴ Price-Earnings Ratio = €11.78 ÷ €0.202 = 58.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 GET, such as capital structure and profitability. 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 GET’s P/E of 58.3x is higher than its industry peers (19.2x), 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.
A few caveats
However, before you rush out to sell your GET shares, it is important to note that this conclusion is based on two key assumptions. 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 accidentally compared lower growth firms with GET, then GET’s P/E would naturally be higher since investors would reward GET’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with GET, GET’s P/E would again be higher since investors would reward GET’s lower risk with a higher price as well. 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:
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 GET. 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 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.