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Is Central Asia Metals plc’s (LON:CAML) PE Ratio A Signal To Buy For Investors?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Central Asia Metals plc (LON:CAML)’s fundamentals and stock market performance.

Central Asia Metals plc (LON:CAML) is trading with a trailing P/E of 12.2x, which is lower than the industry average of 13x. While this makes CAML appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

Breaking down the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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 CAML

Price-Earnings Ratio = Price per share ÷ Earnings per share

CAML Price-Earnings Ratio = \$3.55 ÷ \$0.290 = 12.2x

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 CAML, 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. Since CAML’s P/E of 12.2x is lower than its industry peers (13x), it means that investors are paying less than they should for each dollar of CAML’s earnings. Therefore, according to this analysis, CAML is an under-priced stock.

A few caveats

Before you jump to the conclusion that CAML is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to CAML, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CAML, 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 CAML to are fairly valued by the market. If this does not hold, there is a possibility that CAML’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

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 CAML. 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. 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 highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for CAML’s future growth? Take a look at our free research report of analyst consensus for CAML’s outlook.
2. Past Track Record: Has CAML 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 CAML’s historicals for more clarity.
3. 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.