Yahoo Finance Does Aurelia Metals Limited’s (ASX:AMI) PE Ratio Warrant A Buy?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Aurelia Metals Limited (ASX:AMI)’s fundamentals and stock market performance.
Aurelia Metals Limited (ASX:AMI) is currently trading at a trailing P/E of 7.5x, which is lower than the industry average of 12.8x. While this makes AMI appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Aurelia Metals
What you need to know about the P/E 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 AMI
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMI Price-Earnings Ratio = A$0.58 ÷ A$0.0774 = 7.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 AMI, 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. At 7.5x, AMI’s P/E is lower than its industry peers (12.8x). This implies that investors are undervaluing each dollar of AMI’s earnings. As such, our analysis shows that AMI represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy AMI immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to AMI, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AMI, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AMI to are fairly valued by the market. If this is violated, AMI’s P/E may be lower than its peers as they are actually overvalued by investors.
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 AMI 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AMI’s future growth? Take a look at our free research report of analyst consensus for AMI’s outlook.
Past Track Record: Has AMI 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 AMI’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.
