Does Aggregated Micro Power Holdings plc’s (LON:AMPH) PE Ratio Signal A Selling Opportunity?
Aggregated Micro Power Holdings plc (AIM:AMPH) trades with a trailing P/E of 61x, which is higher than the industry average of 39.2x. While AMPH might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Aggregated Micro Power Holdings
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 pound of the company’s earnings.
P/E Calculation for AMPH
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMPH Price-Earnings Ratio = £1.02 ÷ £0.017 = 61x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AMPH, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. AMPH’s P/E of 61x is higher than its industry peers (39.2x), which implies that each dollar of AMPH’s earnings is being overvalued by investors. Therefore, according to this analysis, AMPH is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your AMPH shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to AMPH. 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 AMPH, 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 AMPH to are fairly valued by the market. If this does not hold, there is a possibility that AMPH’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on AMPH, 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:
Financial Health: Is AMPH’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has AMPH 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 AMPH’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.
