Yahoo Finance Should You Buy Aveo Group (ASX:AOG) At This PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Aveo Group (ASX:AOG).
Aveo Group (ASX:AOG) is currently trading at a trailing P/E of 4.9x, which is lower than the industry average of 12.1x. While this makes AOG appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Aveo Group
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 AOG
Price-Earnings Ratio = Price per share ÷ Earnings per share
AOG Price-Earnings Ratio = A$2.41 ÷ A$0.488 = 4.9x
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 AOG, 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 AOG’s P/E of 4.9x is lower than its industry peers (12.1x), it means that investors are paying less than they should for each dollar of AOG’s earnings. Therefore, according to this analysis, AOG is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy AOG, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AOG, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AOG, 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 AOG to are fairly valued by the market. If this does not hold true, AOG’s lower P/E ratio may be because firms in our peer group are 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 add more of AOG 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 AOG’s future growth? Take a look at our free research report of analyst consensus for AOG’s outlook.
Past Track Record: Has AOG 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 AOG’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.
