Yahoo Finance Should You Be Tempted To Sell Ag Growth International Inc (TSE:AFN) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Ag Growth International Inc (TSE:AFN) trades with a trailing P/E of 30.6, which is higher than the industry average of 25.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Ag Growth International
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 AFN
Price-Earnings Ratio = Price per share ÷ Earnings per share
AFN Price-Earnings Ratio = CA$62.01 ÷ CA$2.029 = 30.6x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AFN, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 30.6, AFN’s P/E is higher than its industry peers (25.9). This implies that investors are overvaluing each dollar of AFN’s earnings. This multiple is a median of profitable companies of 9 Machinery companies in CA including Sigma Industries, Exco Technologies and Reko International Group. You could think of it like this: the market is pricing AFN as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to AFN. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where Ag Growth International Inc 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 AFN 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 AFN. 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 AFN’s future growth? Take a look at our free research report of analyst consensus for AFN’s outlook.
Past Track Record: Has AFN 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 AFN’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.
