Asia Pacific Wire & Cable Corporation Limited (NASDAQ:APWC) trades with a trailing P/E of 4x, which is lower than the industry average of 18.7x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Asia Pacific Wire & Cable
What you need to know about 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 APWC
Price-Earnings Ratio = Price per share ÷ Earnings per share
APWC Price-Earnings Ratio = $2.55 ÷ $0.631 = 4x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to APWC, 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. At 4x, APWC’s P/E is lower than its industry peers (18.7x). This implies that investors are undervaluing each dollar of APWC’s earnings. As such, our analysis shows that APWC represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy APWC immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to APWC, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with APWC, 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 APWC to are fairly valued by the market. If this is violated, APWC’s P/E may be lower than its peers as they are actually overvalued by investors.
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 APWC 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:
- Financial Health: Is APWC’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 APWC 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 APWC’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.