I am writing today to help inform people who are new to the stock market and want to begin learning the link between CCC SA (WSE:CCC)’s fundamentals and stock market performance.
CCC SA (WSE:CCC) is currently trading at a trailing P/E of 55x, which is higher than the industry average of 13x. While this makes CCC 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for CCC
Breaking down the P/E ratio
P/E is a popular ratio used for 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for CCC
Price per share = PLN240
Earnings per share = PLN4.365
∴ Price-Earnings Ratio = PLN240 ÷ PLN4.365 = 55x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CCC, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll 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.
Since CCC’s P/E of 55x is higher than its industry peers (13x), it means that investors are paying more than they should for each dollar of CCC’s earnings. As such, our analysis shows that CCC represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that CCC 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 CCC. 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 CCC, then CCC’s P/E would naturally be higher since investors would reward CCC’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with CCC, CCC’s P/E would again be higher since investors would reward CCC’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing CCC to are fairly valued by the market. If this assumption does not hold true, CCC’s higher P/E ratio may be 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 CCC. 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:
- Future Outlook: What are well-informed industry analysts predicting for CCC’s future growth? Take a look at our free research report of analyst consensus for CCC’s outlook.
- Past Track Record: Has CCC 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 CCC’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.