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# Should You Sell ChemoCentryx Inc (NASDAQ:CCXI) At This PE Ratio?

ChemoCentryx Inc (NASDAQ:CCXI) is trading with a trailing P/E of 42.1x, which is higher than the industry average of 28.2x. 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. 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.

### Breaking down the Price-Earnings ratio

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 CCXI

Price per share = \$12.52

Earnings per share = \$0.297

∴ Price-Earnings Ratio = \$12.52 ÷ \$0.297 = 42.1x

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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CCXI, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

CCXI’s P/E of 42.1x is higher than its industry peers (28.2x), which implies that each dollar of CCXI’s earnings is being overvalued by investors. As such, our analysis shows that CCXI represents an over-priced stock.

### Assumptions to watch out for

However, before you rush out to sell your CCXI shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to CCXI. 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 CCXI, then investors would naturally value CCXI at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with CCXI, investors would also value CCXI at a higher price since it is a higher growth investment. Both scenarios would explain why CCXI has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing CCXI to are fairly valued by the market. If this assumption is violated, CCXI’s P/E may be higher than its peers because its peers are actually undervalued by investors. 