Yahoo Finance Is Arkema SA. (EPA:AKE) A Buy At Its Current PE Ratio?
Arkema SA. (ENXTPA:AKE) trades with a trailing P/E of 13.3x, which is lower than the industry average of 16.9x. While AKE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Arkema
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AKE
Price-Earnings Ratio = Price per share ÷ Earnings per share
AKE Price-Earnings Ratio = €103.95 ÷ €7.84 = 13.3x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AKE, 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. At 13.3x, AKE’s P/E is lower than its industry peers (16.9x). This implies that investors are undervaluing each dollar of AKE’s earnings. As such, our analysis shows that AKE represents an under-priced stock.
A few caveats
Before you jump to the conclusion that AKE is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AKE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with AKE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing AKE to are fairly valued by the market. If this does not hold true, AKE’s lower P/E ratio may be because firms in our peer group are overvalued 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 add more of AKE to your portfolio. 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 AKE’s future growth? Take a look at our free research report of analyst consensus for AKE’s outlook.
Past Track Record: Has AKE 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 AKE’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
