Yahoo Finance Is GrafTech International Ltd (NYSE:EAF) Attractive At This 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.
GrafTech International Ltd (NYSE:EAF) trades with a trailing P/E of 12.9x, which is lower than the industry average of 19.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for GrafTech International
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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.
P/E Calculation for EAF
Price-Earnings Ratio = Price per share ÷ Earnings per share
EAF Price-Earnings Ratio = $20.14 ÷ $1.567 = 12.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as EAF, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. EAF’s P/E of 12.9 is lower than its industry peers (19.9), which implies that each dollar of EAF’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Electrical companies in US including Vivint Solar, Highpower International and Asia Pacific Wire & Cable. One could put it like this: the market is pricing EAF as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to EAF, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with EAF, 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 EAF to are fairly valued by the market. If this is violated, EAF’s P/E may be lower than its peers as they are actually overvalued by investors.
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 EAF 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 EAF’s future growth? Take a look at our free research report of analyst consensus for EAF’s outlook.
Past Track Record: Has EAF 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 EAF’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.
