I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in American Woodmark Corporation (NASDAQ:AMWD).
American Woodmark Corporation (NASDAQ:AMWD) is trading with a trailing P/E of 25.9x, which is higher than the industry average of 23.2x. 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for American Woodmark
What you need to know about 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 dollar of the company’s earnings.
P/E Calculation for AMWD
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMWD Price-Earnings Ratio = $97.8 ÷ $3.771 = 25.9x
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 AMWD, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. AMWD’s P/E of 25.9x is higher than its industry peers (23.2x), which implies that each dollar of AMWD’s earnings is being overvalued by investors. As such, our analysis shows that AMWD represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your AMWD shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to AMWD, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with AMWD, 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 AMWD to are fairly valued by the market. If this is violated, AMWD’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 AMWD, 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:
- Future Outlook: What are well-informed industry analysts predicting for AMWD’s future growth? Take a look at our free research report of analyst consensus for AMWD’s outlook.
- Past Track Record: Has AMWD 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 AMWD’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.