ASX:MAT PE PEG Gauge Dec 6th 17
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 MAT
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAT Price-Earnings Ratio = A$0.25 ÷ A$0.014 = 17x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MAT, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 17x, MAT’s P/E is higher than its industry peers (14.6x). This implies that investors are overvaluing each dollar of MAT’s earnings. As such, our analysis shows that MAT represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your MAT shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to MAT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with MAT, 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 MAT to are fairly valued by the market. If this does not hold, there is a possibility that MAT’s P/E is lower because our peer group is overvalued 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 MAT. 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 you are considering investing in MAT, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Matsa Resources 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.