Yahoo Finance Does Evolution Mining Limited’s (ASX:EVN) PE Ratio Warrant A Sell?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Evolution Mining Limited (ASX:EVN) is currently trading at a trailing P/E of 22.7x, which is higher than the industry average of 11.1x. While EVN might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Evolution Mining
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 EVN
Price-Earnings Ratio = Price per share ÷ Earnings per share
EVN Price-Earnings Ratio = A$2.74 ÷ A$0.121 = 22.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to EVN, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. EVN’s P/E of 22.7x is higher than its industry peers (11.1x), which implies that each dollar of EVN’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Metals and Mining companies in AU including Gladiator Resources, Titan Minerals and Rox Resources. Therefore, according to this analysis, EVN is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your EVN shares, 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 EVN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with EVN, 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 EVN to are fairly valued by the market. If this is violated, EVN’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on EVN, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 EVN’s future growth? Take a look at our free research report of analyst consensus for EVN’s outlook.
Past Track Record: Has EVN 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 EVN’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.
