ASX:MZM PE PEG Gauge Nov 27th 17
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 MZM
Price-Earnings Ratio = Price per share ÷ Earnings per share
MZM Price-Earnings Ratio = A$0.3 ÷ A$0.012 = 24.6x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MZM, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 24.6x, MZM’s P/E is higher than its industry peers (13.8x). This implies that investors are overvaluing each dollar of MZM’s earnings. As such, our analysis shows that MZM represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your MZM shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to MZM, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with MZM, 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 MZM to are fairly valued by the market. If this does not hold true, MZM’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 MZM. 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.
Are you a potential investor? If MZM has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Montezuma Mining for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.