ASX:MZM PE PEG Gauge Feb 27th 18
P/E is a popular ratio used for relative valuation. 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 MZM
Price-Earnings Ratio = Price per share ÷ Earnings per share
MZM Price-Earnings Ratio = A$0.24 ÷ A$0.012 = 19.3x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MZM, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since MZM’s P/E of 19.3x is higher than its industry peers (13x), it means that investors are paying more than they should for each dollar of MZM’s earnings. As such, our analysis shows that MZM represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your MZM shares, it is important to note that this conclusion is based on two key assumptions. 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 compared lower risk firms with MZM, 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 MZM to are fairly valued by the market. If this is violated, MZM’s P/E may be lower than its peers as they are actually overvalued by investors.
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.