Is Anglo-Eastern Plantations Plc (LSE:AEP) A Buy At Its Current PE Ratio?
Anglo-Eastern Plantations Plc (LSE:AEP) trades with a trailing P/E of 9.3x, which is lower than the industry average of 24.2x. While AEP 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. 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 AEP
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 pound of the company’s earnings.
P/E Calculation for AEP
Price-Earnings Ratio = Price per share ÷ Earnings per share
AEP Price-Earnings Ratio = 10.5 ÷ 1.133 = 9.3x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AEP, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since AEP’s P/E of 9.3x is lower than its industry peers (24.2x), it means that investors are paying less than they should for each dollar of AEP’s earnings. As such, our analysis shows that AEP represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy AEP, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to AEP. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with AEP, 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 AEP to are fairly valued by the market. If this does not hold, there is a possibility that AEP’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 AEP. 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 AEP, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Anglo-Eastern Plantations 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.
