Yahoo Finance Does BayWa Aktiengesellschaft’s (FRA:BYW) PE Ratio Signal A Selling Opportunity?
BayWa Aktiengesellschaft (DB:BYW) is currently trading at a trailing P/E of 199.9x, which is higher than the industry average of 16.3x. While BYW 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for BayWa
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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.
P/E Calculation for BYW
Price-Earnings Ratio = Price per share ÷ Earnings per share
BYW Price-Earnings Ratio = €31.8 ÷ €0.159 = 199.9x
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 BYW, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since BYW’s P/E of 199.9x is higher than its industry peers (16.3x), it means that investors are paying more than they should for each dollar of BYW’s earnings. As such, our analysis shows that BYW represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that BYW should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BYW, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BYW, 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 BYW to are fairly valued by the market. If this is violated, BYW’s P/E may be lower than its peers as they are actually overvalued 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 BYW. 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 BYW’s future growth? Take a look at our free research report of analyst consensus for BYW’s outlook.
Past Track Record: Has BYW 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 BYW’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.
