Yahoo Finance Is It Time To Sell AP Oil International Limited (SGX:5AU) Based Off Its PE Ratio?
AP Oil International Limited (SGX:5AU) is currently trading at a trailing P/E of 13.9x, which is higher than the industry average of 12.1x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for AP Oil International
Breaking down the P/E ratio
P/E is a popular ratio used for 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 5AU
Price-Earnings Ratio = Price per share ÷ Earnings per share
5AU Price-Earnings Ratio = SGD0.21 ÷ SGD0.015 = 13.9x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 5AU, 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. Since 5AU’s P/E of 13.9x is higher than its industry peers (12.1x), it means that investors are paying more than they should for each dollar of 5AU’s earnings. Therefore, according to this analysis, 5AU is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your 5AU shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 5AU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with 5AU, 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 5AU to are fairly valued by the market. If this is violated, 5AU’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on 5AU, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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:
Financial Health: Is 5AU’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has 5AU 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 5AU’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.
