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Does Advanced Energy Industries Inc’s (NASDAQ:AEIS) PE Ratio Signal A Buying Opportunity?

Advanced Energy Industries Inc (NASDAQ:AEIS) is trading with a trailing P/E of 17.8x, which is lower than the industry average of 24.6x. 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 Advanced Energy Industries

Breaking down the Price-Earnings ratio

NasdaqGS:AEIS PE PEG Gauge Apr 30th 18
NasdaqGS:AEIS PE PEG Gauge Apr 30th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 AEIS

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

AEIS Price-Earnings Ratio = $60.94 ÷ $3.424 = 17.8x

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 AEIS, 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 AEIS’s P/E of 17.8x is lower than its industry peers (24.6x), it means that investors are paying less than they should for each dollar of AEIS’s earnings. As such, our analysis shows that AEIS represents an under-priced stock.

A few caveats

However, before you rush out to buy AEIS, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to AEIS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with AEIS, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AEIS to are fairly valued by the market. If this does not hold true, AEIS’s lower P/E ratio may be because firms in our peer group are 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 AEIS. 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 urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for AEIS’s future growth? Take a look at our free research report of analyst consensus for AEIS’s outlook.

  2. Past Track Record: Has AEIS 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 AEIS’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.

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