Yahoo Finance Is AUB Group Limited (ASX:AUB) Attractive At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
AUB Group Limited (ASX:AUB) trades on a trailing P/E of 18.8. This isn’t too far from the industry average (which is 18.3). Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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.
See our latest analysis for AUB Group
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 AUB
Price-Earnings Ratio = Price per share ÷ Earnings per share
AUB Price-Earnings Ratio = A$13.68 ÷ A$0.729 = 18.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AUB, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. AUB Group Limited (ASX:AUB) is trading with a trailing P/E of 18.8, which is close to the industry average of 18.3. This multiple is a median of profitable companies of 8 Insurance companies in AU including Freedom Insurance Group, Suncorp Group and Medibank Private. You can think of it like this: the market is suggesting that AUB has similar prospects to its peers in the same industry.
Assumptions to be aware of
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 AUB. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where AUB Group Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to AUB may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 AUB. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AUB’s future growth? Take a look at our free research report of analyst consensus for AUB’s outlook.
Past Track Record: Has AUB 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 AUB’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.
