Yahoo Finance Should You Be Tempted To Sell Magellan Financial Group (ASX:MFG) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Magellan Financial Group (ASX:MFG).
Magellan Financial Group (ASX:MFG) trades with a trailing P/E of 24.9x, which is higher than the industry average of 17.7x. While MFG 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Magellan Financial Group
Breaking down 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 MFG
Price-Earnings Ratio = Price per share ÷ Earnings per share
MFG Price-Earnings Ratio = A$23.57 ÷ A$0.945 = 24.9x
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 MFG, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 24.9x, MFG’s P/E is higher than its industry peers (17.7x). This implies that investors are overvaluing each dollar of MFG’s earnings. Therefore, according to this analysis, MFG is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your MFG shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MFG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MFG, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MFG to are fairly valued by the market. If this is violated, MFG’s P/E may be lower than its peers as they are actually overvalued by investors.
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 MFG. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for MFG’s future growth? Take a look at our free research report of analyst consensus for MFG’s outlook.
Past Track Record: Has MFG 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 MFG’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.
