Yahoo Finance Should You Be Tempted To Buy AEM Holdings Ltd (SGX:AWX) Because Of Its PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in AEM Holdings Ltd (SGX:AWX).
AEM Holdings Ltd (SGX:AWX) is trading with a trailing P/E of 8.5x, which is lower than the industry average of 10.7x. While AWX might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for AEM Holdings
Demystifying the P/E ratio
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 AWX
Price-Earnings Ratio = Price per share ÷ Earnings per share
AWX Price-Earnings Ratio = SGD1.15 ÷ SGD0.135 = 8.5x
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 AWX, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 8.5x, AWX’s P/E is lower than its industry peers (10.7x). This implies that investors are undervaluing each dollar of AWX’s earnings. Therefore, according to this analysis, AWX is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy AWX immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to AWX. 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 AWX, 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 AWX to are fairly valued by the market. If this does not hold true, AWX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of AWX to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AWX’s future growth? Take a look at our free research report of analyst consensus for AWX’s outlook.
Past Track Record: Has AWX been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of AWX’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
