Yahoo Finance Is Clinuvel Pharmaceuticals Limited (ASX:CUV) 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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
Clinuvel Pharmaceuticals Limited (ASX:CUV) is trading with a trailing P/E of 54.8, which is higher than the industry average of 29.8. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. 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.
View our latest analysis for Clinuvel Pharmaceuticals
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 CUV
Price-Earnings Ratio = Price per share ÷ Earnings per share
CUV Price-Earnings Ratio = A$15.19 ÷ A$0.277 = 54.8x
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 CUV, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 54.8, CUV’s P/E is higher than its industry peers (29.8). This implies that investors are overvaluing each dollar of CUV’s earnings. This multiple is a median of profitable companies of stocks internationally, operating in the Biotechs industry. I’ve decided to use a global peer group as there’s not enough companies in AU that are considered as appropriate peers, and I wanted to get a broader perspective on the regional multiple. Some peers include Monash IVF Group, CSL and Sirtex Medical. You could also say that the market is suggesting that CUV is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to CUV. If not, the difference in P/E might be a result of other factors. For example, if Clinuvel Pharmaceuticals Limited is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with CUV are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
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 CUV. 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 CUV’s future growth? Take a look at our free research report of analyst consensus for CUV’s outlook.
Past Track Record: Has CUV 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 CUV’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.
