ASX:NME PE PEG Gauge Apr 3rd 18
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 dollar of the company’s earnings.
P/E Calculation for NME
Price-Earnings Ratio = Price per share ÷ Earnings per share
NME Price-Earnings Ratio = A$0.02 ÷ A$0.011 = 1.9x
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 NME, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. NME’s P/E of 1.9x is lower than its industry peers (14.1x), which implies that each dollar of NME’s earnings is being undervalued by investors. Therefore, according to this analysis, NME is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that NME is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to NME, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with NME, 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 NME to are fairly valued by the market. If this does not hold, there is a possibility that NME’s P/E is lower because our peer group is 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.