Asian Growth Properties Limited (AIM:AGP) is currently trading at a trailing P/E of 1.7x, which is lower than the industry average of 10.2x. While AGP 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Asian Growth Properties
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 pound of the company’s earnings.
P/E Calculation for AGP
Price-Earnings Ratio = Price per share ÷ Earnings per share
AGP Price-Earnings Ratio = HK$4.83 ÷ HK$2.779 = 1.7x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AGP, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AGP’s P/E of 1.7x is lower than its industry peers (10.2x), which implies that each dollar of AGP’s earnings is being undervalued by investors. As such, our analysis shows that AGP represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that AGP 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 AGP, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AGP, 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 AGP to are fairly valued by the market. If this does not hold true, AGP’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 AGP 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.
Are you a potential investor? If you are considering investing in AGP, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.