Yahoo Finance What Does Salvatore Ferragamo SpA’s (BIT:SFER) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Salvatore Ferragamo SpA (BIT:SFER) trades with a trailing P/E of 35.9, which is higher than the industry average of 27.1. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Salvatore Ferragamo
Breaking down the P/E ratio
P/E is a popular ratio used for 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 SFER
Price-Earnings Ratio = Price per share ÷ Earnings per share
SFER Price-Earnings Ratio = €20.76 ÷ €0.579 = 35.9x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SFER, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 35.9, SFER’s P/E is higher than its industry peers (27.1). This implies that investors are overvaluing each dollar of SFER’s earnings. This multiple is a median of profitable companies of 14 Luxury companies in IT including Monnalisa, Stefanel and Ratti. You could also say that the market is suggesting that SFER is a stronger business than the average comparable company.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to SFER. If this isn’t the case, the difference in P/E could be due to other factors. For example, Salvatore Ferragamo SpA could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with SFER are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
Since you may have already conducted your due diligence on SFER, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 SFER’s future growth? Take a look at our free research report of analyst consensus for SFER’s outlook.
Past Track Record: Has SFER 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 SFER’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
