Yahoo Finance Does Acerinox SA.’s (BME:ACX) PE Ratio Warrant A Sell?
Acerinox SA. (BME:ACX) trades with a trailing P/E of 16.6x, which is higher than the industry average of 13.2x. While ACX might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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. View our latest analysis for Acerinox
Breaking down the P/E ratio
P/E is a popular ratio used for 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 ACX
Price-Earnings Ratio = Price per share ÷ Earnings per share
ACX Price-Earnings Ratio = €11.66 ÷ €0.703 = 16.6x
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 ACX, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 16.6x, ACX’s P/E is higher than its industry peers (13.2x). This implies that investors are overvaluing each dollar of ACX’s earnings. Therefore, according to this analysis, ACX is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your ACX shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ACX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with ACX, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ACX to are fairly valued by the market. If this does not hold, there is a possibility that ACX’s P/E is lower because our peer group is overvalued by the market.
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 ACX. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ACX’s future growth? Take a look at our free research report of analyst consensus for ACX’s outlook.
Past Track Record: Has ACX 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 ACX’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.
