Yahoo Finance Does Convatec Group Plc’s (LON:CTEC) PE Ratio Warrant A Sell?
Convatec Group Plc (LSE:CTEC) is currently trading at a trailing P/E of 36.8x, which is higher than the industry average of 28x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Convatec Group
What you need to know about 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 pound of the company’s earnings.
P/E Calculation for CTEC
Price-Earnings Ratio = Price per share ÷ Earnings per share
CTEC Price-Earnings Ratio = $2.99 ÷ $0.081 = 36.8x
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 CTEC, 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 CTEC’s P/E of 36.8x is higher than its industry peers (28x), it means that investors are paying more than they should for each dollar of CTEC’s earnings. As such, our analysis shows that CTEC represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your CTEC shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CTEC, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CTEC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CTEC to are fairly valued by the market. If this is violated, CTEC’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on CTEC, 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 CTEC’s future growth? Take a look at our free research report of analyst consensus for CTEC’s outlook.
Past Track Record: Has CTEC 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 CTEC’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.
