Is Grodno Spólka Akcyjna’s (WSE:GRN) PE Ratio A Signal To Sell For Investors?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Grodno Spólka Akcyjna (WSE:GRN)’s fundamentals and stock market performance.

Grodno Spólka Akcyjna (WSE:GRN) trades with a trailing P/E of 20.2x, which is higher than the industry average of 12.1x. While this makes GRN 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. 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 Grodno Spólka Akcyjna

Demystifying the P/E ratio

WSE:GRN PE PEG Gauge June 8th 18
WSE:GRN PE PEG Gauge June 8th 18

The P/E ratio is one of many ratios used in 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 GRN

Price per share = PLN11.4

Earnings per share = PLN0.563

∴ Price-Earnings Ratio = PLN11.4 ÷ PLN0.563 = 20.2x

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 GRN, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

GRN’s P/E of 20.2x is higher than its industry peers (12.1x), which implies that each dollar of GRN’s earnings is being overvalued by investors. As such, our analysis shows that GRN represents an over-priced stock.

A few caveats

However, before you rush out to sell your GRN 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 GRN. 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 GRN, then GRN’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 GRN. In this case, GRN’s P/E would be higher since investors would also reward GRN’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GRN to are fairly valued by the market. If this assumption is violated, GRN’s P/E may be higher than its peers because its peers are actually undervalued by investors.

WSE:GRN Future Profit June 8th 18
WSE:GRN Future Profit June 8th 18

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 GRN. 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 GRN’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 GRN 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 GRN’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.