Yahoo Finance Should You Be Tempted To Sell Pöyry PLC (HEL:POY1V) Because Of Its PE Ratio?
Pöyry PLC (HLSE:POY1V) is currently trading at a trailing P/E of 87.3x, which is higher than the industry average of 29.8x. While this makes POY1V 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 our latest analysis for Pöyry
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 POY1V
Price-Earnings Ratio = Price per share ÷ Earnings per share
POY1V Price-Earnings Ratio = €5.72 ÷ €0.066 = 87.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to POY1V, 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 POY1V’s P/E of 87.3x is higher than its industry peers (29.8x), it means that investors are paying more than they should for each dollar of POY1V’s earnings. As such, our analysis shows that POY1V represents an over-priced stock.
A few caveats
However, before you rush out to sell your POY1V shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to POY1V. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with POY1V, 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 POY1V to are fairly valued by the market. If this does not hold true, POY1V’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 POY1V. 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 POY1V’s future growth? Take a look at our free research report of analyst consensus for POY1V’s outlook.
Past Track Record: Has POY1V 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 POY1V’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.
