Yahoo Finance Does Clariant AG’s (VTX:CLN) PE Ratio Signal A Selling Opportunity?
Clariant AG (SWX:CLN) is trading with a trailing P/E of 28.1x, which is higher than the industry average of 27.7x. While CLN 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 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 Clariant
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 CLN
Price-Earnings Ratio = Price per share ÷ Earnings per share
CLN Price-Earnings Ratio = CHF23.71 ÷ CHF0.844 = 28.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CLN, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since CLN’s P/E of 28.1x is higher than its industry peers (27.7x), it means that investors are paying more than they should for each dollar of CLN’s earnings. As such, our analysis shows that CLN represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your CLN shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CLN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CLN, 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 CLN to are fairly valued by the market. If this does not hold, there is a possibility that CLN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CLN, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CLN’s future growth? Take a look at our free research report of analyst consensus for CLN’s outlook.
Past Track Record: Has CLN 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 CLN’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.
