ASTI Holdings Limited (SGX:575) trades with a trailing P/E of 51.6x, which is higher than the industry average of 13.9x. While this makes 575 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for ASTI Holdings
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 575
Price-Earnings Ratio = Price per share ÷ Earnings per share
575 Price-Earnings Ratio = SGD0.09 ÷ SGD0.002 = 51.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 575, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 51.6x, 575’s P/E is higher than its industry peers (13.9x). This implies that investors are overvaluing each dollar of 575’s earnings. Therefore, according to this analysis, 575 is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that 575 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to 575, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 575, 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 575 to are fairly valued by the market. If this does not hold true, 575’s lower P/E ratio may be because firms in our peer group are 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.