Yahoo Finance Is AVEVA Group plc Prior to Reverse Merger with Schneider Electric Software Business (LON:AVV) A Sell At Its Current PE Ratio?
AVEVA Group plc Prior to Reverse Merger with Schneider Electric Software Business (LSE:AVV) is currently trading at a trailing P/E of 61.4x, which is higher than the industry average of 31x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for AVEVA Group Prior to Reverse Merger with Schneider Electric Software Business
What you need to know about the P/E 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 pound of the company’s earnings.
P/E Calculation for AVV
Price-Earnings Ratio = Price per share ÷ Earnings per share
AVV Price-Earnings Ratio = £20.34 ÷ £0.331 = 61.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AVV, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. AVV’s P/E of 61.4x is higher than its industry peers (31x), which implies that each dollar of AVV’s earnings is being overvalued by investors. As such, our analysis shows that AVV represents an over-priced stock.
A few caveats
Before you jump to the conclusion that AVV should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AVV, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AVV, 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 AVV to are fairly valued by the market. If this does not hold, there is a possibility that AVV’s P/E is lower because our peer group is 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 AVV. 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:
Future Outlook: What are well-informed industry analysts predicting for AVV’s future growth? Take a look at our free research report of analyst consensus for AVV’s outlook.
Past Track Record: Has AVV 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 AVV’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.
