Yahoo Finance Should You Be Tempted To Sell Poste Italiane SpA (BIT:PST) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Poste Italiane SpA (BIT:PST).
Poste Italiane SpA (BIT:PST) is currently trading at a trailing P/E of 11.5x, which is higher than the industry average of 11.2x. While this makes PST 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Poste Italiane
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 PST
Price-Earnings Ratio = Price per share ÷ Earnings per share
PST Price-Earnings Ratio = €7.25 ÷ €0.631 = 11.5x
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 PST, 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. PST’s P/E of 11.5x is higher than its industry peers (11.2x), which implies that each dollar of PST’s earnings is being overvalued by investors. As such, our analysis shows that PST represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your PST 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 PST. 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 PST, 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 PST to are fairly valued by the market. If this is violated, PST’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in PST. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 PST’s future growth? Take a look at our free research report of analyst consensus for PST’s outlook.
Past Track Record: Has PST 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 PST’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.
