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 learn about the link between company’s fundamentals and stock market performance.
Amtech Systems Inc (NASDAQ:ASYS) is currently trading at a trailing P/E of 3.5x, which is lower than the industry average of 20.4x. 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 ASYS
Price-Earnings Ratio = Price per share ÷ Earnings per share
ASYS Price-Earnings Ratio = $5.14 ÷ $1.475 = 3.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 ASYS, 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 ASYS’s P/E of 3.5 is lower than its industry peers (20.4), it means that investors are paying less for each dollar of ASYS’s earnings. This multiple is a median of profitable companies of 24 Semiconductor companies in US including ARISE Technologies, Daqo New Energy and Micron Technology. One could put it like this: the market is pricing ASYS as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ASYS. 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 ASYS, 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 ASYS to are fairly valued by the market. If this does not hold true, ASYS’s lower P/E ratio may be because firms in our peer group are 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 ASYS 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ASYS’s future growth? Take a look at our free research report of analyst consensus for ASYS’s outlook.
- Past Track Record: Has ASYS 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 ASYS’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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.