Yahoo Finance Should You Be Tempted To Buy Highlight Communications AG (ETR:HLG) Because Of Its PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Highlight Communications AG (ETR:HLG).
Highlight Communications AG (ETR:HLG) is currently trading at a trailing P/E of 15.7x, which is lower than the industry average of 16.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Highlight Communications
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 HLG
Price-Earnings Ratio = Price per share ÷ Earnings per share
HLG Price-Earnings Ratio = CHF6.35 ÷ CHF0.405 = 15.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to HLG, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. HLG’s P/E of 15.7x is lower than its industry peers (16.2x), which implies that each dollar of HLG’s earnings is being undervalued by investors. As such, our analysis shows that HLG represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy HLG, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to HLG, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HLG, 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 HLG to are fairly valued by the market. If this does not hold true, HLG’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on HLG, the undervaluation of the stock may mean it is a good time to top up on 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HLG’s future growth? Take a look at our free research report of analyst consensus for HLG’s outlook.
Past Track Record: Has HLG 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 HLG’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.
