Yahoo Finance Is Amcor Limited (ASX:AMC) A Sell At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Amcor Limited (ASX:AMC).
Amcor Limited (ASX:AMC) is currently trading at a trailing P/E of 18.8x, which is higher than the industry average of 16.7x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Amcor
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 AMC
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMC Price-Earnings Ratio = $10.41 ÷ $0.553 = 18.8x
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 AMC, 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. Since AMC’s P/E of 18.8x is higher than its industry peers (16.7x), it means that investors are paying more than they should for each dollar of AMC’s earnings. As such, our analysis shows that AMC represents an over-priced stock.
A few caveats
Before you jump to the conclusion that AMC 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 AMC, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AMC, 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 AMC to are fairly valued by the market. If this does not hold, there is a possibility that AMC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to AMC. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 AMC’s future growth? Take a look at our free research report of analyst consensus for AMC’s outlook.
Past Track Record: Has AMC 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 AMC’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.
