AIM:ANR PE PEG Gauge Nov 3rd 17
The P/E ratio is one of many ratios used in 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 pound of the company’s earnings.
P/E Calculation for ANR
Price-Earnings Ratio = Price per share ÷ Earnings per share
ANR Price-Earnings Ratio = 0.01 ÷ 0 = 30.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ANR, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. ANR’s P/E of 30.5x is higher than its industry peers (13.9x), which implies that each dollar of ANR’s earnings is being overvalued by investors. Therefore, according to this analysis, ANR is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ANR should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to ANR, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ANR, 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 ANR to are fairly valued by the market. If this does not hold, there is a possibility that ANR’s P/E is lower because our peer group is expensive by the market.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in ANR. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If ANR 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 Altona Energy 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.