Plato Income Maximiser Limited (ASX:PL8) is trading with a trailing P/E of 187.1x, which is higher than the industry average of 23.4x. 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. See our latest analysis for Plato Income Maximiser
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 PL8
Price-Earnings Ratio = Price per share ÷ Earnings per share
PL8 Price-Earnings Ratio = A$1.09 ÷ A$0.006 = 187.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PL8, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 187.1x, PL8’s P/E is higher than its industry peers (23.4x). This implies that investors are overvaluing each dollar of PL8’s earnings. As such, our analysis shows that PL8 represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your PL8 shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PL8, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PL8, 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 PL8 to are fairly valued by the market. If this is violated, PL8’s P/E may be lower than its peers as they are actually overvalued by investors.
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.