Yahoo Finance Should You Be Tempted To Sell EVRAZ plc (LON:EVR) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
EVRAZ plc (LON:EVR) is trading with a trailing P/E of 14.7x, which is higher than the industry average of 11.9x. 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. In this article, 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 EVRAZ
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 EVR
Price-Earnings Ratio = Price per share ÷ Earnings per share
EVR Price-Earnings Ratio = $7.21 ÷ $0.490 = 14.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EVR, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. EVR’s P/E of 14.7x is higher than its industry peers (11.9x), which implies that each dollar of EVR’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Metals and Mining companies in GB including Cora Gold, Patagonia Gold and Ferrexpo. Therefore, according to this analysis, EVR is an over-priced stock.
A few caveats
Before you jump to the conclusion that EVR 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 EVR, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with EVR, 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 EVR to are fairly valued by the market. If this does not hold true, EVR’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 EVR, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for EVR’s future growth? Take a look at our free research report of analyst consensus for EVR’s outlook.
Past Track Record: Has EVR 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 EVR’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
