In This Article:
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Piscines Desjoyaux SA (EPA:ALPDX) is trading with a trailing P/E of 25.8, which is higher than the industry average of 23.5. 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Piscines Desjoyaux
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 ALPDX
Price-Earnings Ratio = Price per share ÷ Earnings per share
ALPDX Price-Earnings Ratio = €13.55 ÷ €0.526 = 25.8x
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 ALPDX, 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 ALPDX’s P/E of 25.8 is higher than its industry peers (23.5), it means that investors are paying more for each dollar of ALPDX’s earnings. This multiple is a median of profitable companies of 7 Leisure companies in FR including Verney-Carron, Trigano and Bénéteau. You could also say that the market is suggesting that ALPDX is a stronger business than the average comparable company.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to ALPDX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Piscines Desjoyaux SA is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to ALPDX may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 ALPDX. 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 urge you to complete your research by taking a look at the following: