ASX:MLM PE PEG Gauge Mar 31st 18
More 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 MLM
Price-Earnings Ratio = Price per share ÷ Earnings per share
MLM Price-Earnings Ratio = A$0.04 ÷ A$0.01 = 4.5x
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 MLM, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. MLM’s P/E of 4.5x is lower than its industry peers (14x), which implies that each dollar of MLM’s earnings is being undervalued by investors. As such, our analysis shows that MLM represents an under-priced stock.
A few caveats While our conclusion might prompt you to buy MLM immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MLM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MLM, 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 MLM to are fairly valued by the market. If this does not hold true, MLM’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.