Yahoo Finance Should You Sell bioMérieux SA. (EPA:BIM) At This PE Ratio?
bioMérieux SA. (ENXTPA:BIM) trades with a trailing P/E of 40.5x, which is higher than the industry average of 27.8x. While this makes BIM appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 bioMérieux
Breaking down the Price-Earnings 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 BIM
Price-Earnings Ratio = Price per share ÷ Earnings per share
BIM Price-Earnings Ratio = €81.9 ÷ €2.02 = 40.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BIM, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. BIM’s P/E of 40.5x is higher than its industry peers (27.8x), which implies that each dollar of BIM’s earnings is being overvalued by investors. As such, our analysis shows that BIM represents an over-priced stock.
A few caveats
However, before you rush out to sell your BIM shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to BIM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with BIM, 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 BIM to are fairly valued by the market. If this does not hold true, BIM’s lower P/E ratio may be because firms in our peer group are 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 BIM. 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 BIM’s future growth? Take a look at our free research report of analyst consensus for BIM’s outlook.
Past Track Record: Has BIM 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 BIM’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.
