Does Montero Mining and Exploration Ltd’s (CVE:MON) PE Ratio Warrant A Sell?
Montero Mining and Exploration Ltd (TSXV:MON) is currently trading at a trailing P/E of 24.9x, which is higher than the industry average of 10.2x. While this makes MON appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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. View our latest analysis for Montero Mining and Exploration
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 MON
Price-Earnings Ratio = Price per share ÷ Earnings per share
MON Price-Earnings Ratio = CA$0.28 ÷ CA$0.011 = 24.9x
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 MON, 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. At 24.9x, MON’s P/E is higher than its industry peers (10.2x). This implies that investors are overvaluing each dollar of MON’s earnings. As such, our analysis shows that MON represents an over-priced stock.
A few caveats
Before you jump to the conclusion that MON should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to MON. 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 MON, 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 MON to are fairly valued by the market. If this is violated, MON’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
