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Is Schneider Electric SE (EPA:SU) Attractive At Its Current PE Ratio?

This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.

Schneider Electric SE (EPA:SU) is currently trading at a trailing P/E of 17, which is close to the industry average of 17.1. While SU might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

Check out our latest analysis for Schneider Electric

Breaking down the P/E ratio

ENXTPA:SU PE PEG Gauge September 6th 18
ENXTPA:SU PE PEG Gauge September 6th 18

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 dollar of the company’s earnings.

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P/E Calculation for SU

Price-Earnings Ratio = Price per share ÷ Earnings per share

SU Price-Earnings Ratio = €68.88 ÷ €4.06 = 17x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SU, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Schneider Electric SE (EPA:SU) is currently trading at a trailing P/E of 17, which is close to the industry average of 17.1. This multiple is a median of profitable companies of 7 Electrical companies in FR including Green Energy 4 Seasons, Mersen and Nexans. One could put it like this: the market is pricing SU as if it is roughly average for its industry.

A few caveats

However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SU. 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 SU, 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 SU to are fairly valued by the market. If this is violated, SU’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

Since you may have already conducted your due diligence on SU, the undervaluation of the stock may mean it is a good time to top up on 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for SU’s future growth? Take a look at our free research report of analyst consensus for SU’s outlook.

  2. Past Track Record: Has SU 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 SU’s historicals for more clarity.

  3. 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.