At $1.69, Is AusNet Services Ltd (ASX:AST) A Buy?
AusNet Services Ltd (ASX:AST) is trading with a trailing P/E of 23.7x, which is lower than the industry average of 26.1x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for AusNet Services
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 AST
Price-Earnings Ratio = Price per share ÷ Earnings per share
AST Price-Earnings Ratio = 1.69 ÷ 0.071 = 23.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 AST, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since AST's P/E of 23.7x is lower than its industry peers (26.1x), it means that investors are paying less than they should for each dollar of AST's earnings. Therefore, according to this analysis, AST is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy AST immediately, there are two important assumptions you should be aware of. 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 compared higher growth firms with AST, 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 AST to are fairly valued by the market. If this does not hold, there is a possibility that AST’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to AST. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If you are considering investing in AST, 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.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on AusNet Services for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
