Torslanda Property Investment AB (Publ) (OM:TORSAB) is currently trading at a trailing P/E of 15.9x, which is higher than the industry average of 6.8x. While this makes TORSAB 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Torslanda Property Investment
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for TORSAB
Price per share = SEK131
Earnings per share = SEK8.22
∴ Price-Earnings Ratio = SEK131 ÷ SEK8.22 = 15.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TORSAB, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since TORSAB’s P/E of 15.9x is higher than its industry peers (6.8x), it means that investors are paying more than they should for each dollar of TORSAB’s earnings. Therefore, according to this analysis, TORSAB is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your TORSAB shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to TORSAB. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with TORSAB, then TORSAB’s P/E would naturally be higher since investors would reward TORSAB’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with TORSAB, TORSAB’s P/E would again be higher since investors would reward TORSAB’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing TORSAB to are fairly valued by the market. If this assumption does not hold true, TORSAB’s higher P/E ratio may be because firms in our peer group are being undervalued 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 rebalance your portfolio and reduce your holdings in TORSAB. 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is TORSAB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Valuation: What is TORSAB worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TORSAB is currently mispriced by the market.
- 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.
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