Yahoo Finance Is It Time To Sell EnerSys (NYSE:ENS) Based Off 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 EnerSys (NYSE:ENS).
EnerSys (NYSE:ENS) trades with a trailing P/E of 27.9x, which is higher than the industry average of 17.7x. While this makes ENS 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for EnerSys
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 ENS
Price-Earnings Ratio = Price per share ÷ Earnings per share
ENS Price-Earnings Ratio = $78.26 ÷ $2.807 = 27.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 ENS, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. ENS’s P/E of 27.9x is higher than its industry peers (17.7x), which implies that each dollar of ENS’s earnings is being overvalued by investors. Therefore, according to this analysis, ENS is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your ENS shares, 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 ENS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ENS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing ENS to are fairly valued by the market. If this does not hold, there is a possibility that ENS’s P/E is lower because our peer group is 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 ENS. 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 ENS’s future growth? Take a look at our free research report of analyst consensus for ENS’s outlook.
Past Track Record: Has ENS 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 ENS’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.
