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# Does Mangata Holding SA’s (WSE:MGT) PE Ratio Warrant A Sell?

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 Mangata Holding SA (WSE:MGT)’s fundamentals and stock market performance.

Mangata Holding SA (WSE:MGT) is trading with a trailing P/E of 14.9x, which is higher than the industry average of 11.9x. 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.

### Breaking down the P/E ratio

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 MGT

Price per share = PLN98

Earnings per share = PLN6.566

∴ Price-Earnings Ratio = PLN98 ÷ PLN6.566 = 14.9x

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 MGT, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. 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.

At 14.9x, MGT’s P/E is higher than its industry peers (11.9x). This implies that investors are overvaluing each dollar of MGT’s earnings. This multiple is a median of profitable companies of 16 Machinery companies in PL including Kopex, IBC POLSKA F & P spólka akcyjna and Fabryki Sprzetu i Narzedzi Górniczych Grupa Kapitalowa FASING. Therefore, according to this analysis, MGT is an over-priced stock.

### Assumptions to watch out for

While our conclusion might prompt you to sell your MGT shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to MGT. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with MGT, then investors would naturally value MGT at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with MGT, investors would also value MGT at a higher price since it is a higher growth investment. Both scenarios would explain why MGT has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing MGT to are fairly valued by the market. If this assumption is violated, MGT’s P/E may be higher than its peers because its peers are actually undervalued by investors.

### 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 MGT. 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:

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