Yahoo Finance Is Treasury Wine Estates Limited (ASX:TWE) A Sell At Its Current PE Ratio?
Treasury Wine Estates Limited (ASX:TWE) trades with a trailing P/E of 38.1x, which is higher than the industry average of 22.6x. While TWE might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Treasury Wine Estates
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 TWE
Price-Earnings Ratio = Price per share ÷ Earnings per share
TWE Price-Earnings Ratio = A$16.62 ÷ A$0.436 = 38.1x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TWE, 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. Since TWE’s P/E of 38.1x is higher than its industry peers (22.6x), it means that investors are paying more than they should for each dollar of TWE’s earnings. Therefore, according to this analysis, TWE is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that TWE 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 TWE, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with TWE, 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 TWE to are fairly valued by the market. If this does not hold, there is a possibility that TWE’s P/E is lower because our peer group is overvalued 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 TWE. 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:
Future Outlook: What are well-informed industry analysts predicting for TWE’s future growth? Take a look at our free research report of analyst consensus for TWE’s outlook.
Past Track Record: Has TWE 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 TWE’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.
