Yahoo Finance Here’s What Jupiter Mines Limited’s (ASX:JMS) P/E Ratio Is Telling Us
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.
Jupiter Mines Limited (ASX:JMS) trades with a trailing P/E of 3.7x, which is lower than the industry average of 9.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, 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 Jupiter Mines
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 JMS
Price-Earnings Ratio = Price per share ÷ Earnings per share
JMS Price-Earnings Ratio = A$0.30 ÷ A$0.0829 = 3.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to JMS, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. JMS’s P/E of 3.7 is lower than its industry peers (9.8), which implies that each dollar of JMS’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Metals and Mining companies in AU including Aeris Resources, Citigold and Highlands Pacific. You can think of it like this: the market is suggesting that JMS is a weaker business than the average comparable company.
A few caveats
However, 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 JMS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with JMS, 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 JMS to are fairly valued by the market. If this does not hold true, JMS’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 JMS 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 JMS’s future growth? Take a look at our free research report of analyst consensus for JMS’s outlook.
Past Track Record: Has JMS 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 JMS’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.
