ASX:SMD PE PEG Gauge Mar 2nd 18
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 SMD
Price-Earnings Ratio = Price per share ÷ Earnings per share
SMD Price-Earnings Ratio = A$0.01 ÷ A$0.002 = 5.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 SMD, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since SMD’s P/E of 5.1x is lower than its industry peers (12.9x), it means that investors are paying less than they should for each dollar of SMD’s earnings. As such, our analysis shows that SMD represents an under-priced stock.
A few caveats
However, before you rush out to buy SMD, 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 SMD, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with SMD, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SMD to are fairly valued by the market. If this is violated, SMD’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.