Yahoo Finance Is It Time To Buy Hornbach Baumarkt AG (FRA:HBM) Based Off Its PE Ratio?
Hornbach Baumarkt AG (DB:HBM) is currently trading at a trailing P/E of 13.2x, which is lower than the industry average of 17.7x. While this makes HBM appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Hornbach Baumarkt
Demystifying the P/E 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 HBM
Price-Earnings Ratio = Price per share ÷ Earnings per share
HBM Price-Earnings Ratio = €28.5 ÷ €2.154 = 13.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 HBM, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. HBM’s P/E of 13.2x is lower than its industry peers (17.7x), which implies that each dollar of HBM’s earnings is being undervalued by investors. As such, our analysis shows that HBM represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that HBM is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to HBM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with HBM, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing HBM to are fairly valued by the market. If this does not hold, there is a possibility that HBM’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of HBM to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HBM’s future growth? Take a look at our free research report of analyst consensus for HBM’s outlook.
Past Track Record: Has HBM 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 HBM’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.
