Is FG. Europe S.A. (ATH:FGE) A Sell At Its Current PE Ratio?

FG. Europe S.A. (ATSE:FGE) is trading with a trailing P/E of 30.9x, which is higher than the industry average of 23.5x. While FGE might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 F.G. Europe

What you need to know about the P/E ratio

P/E is often used for relative valuation since earnings power is a chief 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 FGE

Price per share = €0.73

Earnings per share = €0.024

∴ Price-Earnings Ratio = €0.73 ÷ €0.024 = 30.9x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FGE, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will 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.

FGE’s P/E of 30.9x is higher than its industry peers (23.5x), which implies that each dollar of FGE’s earnings is being overvalued by investors. Therefore, according to this analysis, FGE is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that FGE should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to FGE. 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 FGE, then FGE’s P/E would naturally be higher since investors would reward FGE’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with FGE, FGE’s P/E would again be higher since investors would reward FGE’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing FGE to are fairly valued by the market. If this does not hold, there is a possibility that FGE’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 FGE. 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:

1. Financial Health: Is FGE’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.
2. Past Track Record: Has FGE 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 FGE’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.