Yahoo Finance Should You Be Tempted To Buy AusNet Services Ltd (ASX:AST) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in AusNet Services Ltd (ASX:AST).
AusNet Services Ltd (ASX:AST) is currently trading at a trailing P/E of 19.4x, which is lower than the industry average of 22.6x. While AST 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for AusNet Services
Breaking down the P/E ratio
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 AST
Price-Earnings Ratio = Price per share ÷ Earnings per share
AST Price-Earnings Ratio = A$1.57 ÷ A$0.0808 = 19.4x
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 AST, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 19.4x, AST’s P/E is lower than its industry peers (22.6x). This implies that investors are undervaluing each dollar of AST’s earnings. As such, our analysis shows that AST represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy AST, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to AST. 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 AST, 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 AST to are fairly valued by the market. If this does not hold true, AST’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 AST 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 AST’s future growth? Take a look at our free research report of analyst consensus for AST’s outlook.
Past Track Record: Has AST 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 AST’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.
