Weyco Group Inc (NASDAQ:WEYS) is currently trading at a trailing P/E of 19.9x, which is higher than the industry average of 18.4x. While this makes WEYS 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Weyco Group
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 WEYS
Price-Earnings Ratio = Price per share ÷ Earnings per share
WEYS Price-Earnings Ratio = $32.01 ÷ $1.607 = 19.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to WEYS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. WEYS’s P/E of 19.9x is higher than its industry peers (18.4x), which implies that each dollar of WEYS’s earnings is being overvalued by investors. As such, our analysis shows that WEYS represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your WEYS shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to WEYS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with WEYS, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing WEYS to are fairly valued by the market. If this does not hold true, WEYS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 WEYS. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If WEYS has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.