Should You Buy Austevoll Seafood ASA (OB:AUSS) At This PE Ratio?
Austevoll Seafood ASA (OB:AUSS) is trading with a trailing P/E of 17.9x, which is lower than the industry average of 18x. 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Austevoll Seafood
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AUSS
Price-Earnings Ratio = Price per share ÷ Earnings per share
AUSS Price-Earnings Ratio = NOK89.7 ÷ NOK5 = 17.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AUSS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 17.9x, AUSS’s P/E is lower than its industry peers (18x). This implies that investors are undervaluing each dollar of AUSS’s earnings. Therefore, according to this analysis, AUSS is an under-priced stock.
A few caveats
However, before you rush out to buy AUSS, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to AUSS. 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 AUSS, 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 AUSS to are fairly valued by the market. If this does not hold, there is a possibility that AUSS’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of AUSS to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 AUSS’s future growth? Take a look at our free research report of analyst consensus for AUSS’s outlook.
Past Track Record: Has AUSS 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 AUSS’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.
