Yahoo Finance Should You Be Tempted To Sell Xing SE (ETR:O1BC) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Xing SE (ETR:O1BC)’s fundamentals and stock market performance.
Xing SE (ETR:O1BC) is trading with a trailing P/E of 59.2x, which is higher than the industry average of 37.1x. While this makes O1BC 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. View out our latest analysis for Xing
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 O1BC
Price-Earnings Ratio = Price per share ÷ Earnings per share
O1BC Price-Earnings Ratio = €286 ÷ €4.83 = 59.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to O1BC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since O1BC’s P/E of 59.2x is higher than its industry peers (37.1x), it means that investors are paying more than they should for each dollar of O1BC’s earnings. Therefore, according to this analysis, O1BC is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your O1BC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to O1BC. 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 O1BC, 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 O1BC to are fairly valued by the market. If this does not hold true, O1BC’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 O1BC. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for O1BC’s future growth? Take a look at our free research report of analyst consensus for O1BC’s outlook.
Past Track Record: Has O1BC 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 O1BC’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.
