In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Bravida Holding AB (publ) (STO:BRAV) is currently trading at a trailing P/E of 16.1, which is higher than the industry average of 15.2. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Bravida Holding
Breaking down 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 BRAV
Price-Earnings Ratio = Price per share ÷ Earnings per share
BRAV Price-Earnings Ratio = SEK68.65 ÷ SEK4.268 = 16.1x
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 BRAV, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since BRAV’s P/E of 16.1 is higher than its industry peers (15.2), it means that investors are paying more for each dollar of BRAV’s earnings. This multiple is a median of profitable companies of 11 Commercial Services companies in SE including Stockwik Förvaltning, ITAB Shop Concept and Lammhults Design Group. You could think of it like this: the market is pricing BRAV as if it is a stronger company than the average of its industry group.
A few caveats
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to BRAV. If not, the difference in P/E might be a result of other factors. For example, Bravida Holding AB (publ) could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with BRAV are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
Since you may have already conducted your due diligence on BRAV, 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 highly recommend you to complete your research by taking a look at the following: