Should You Sell Anaconda Mining Inc (TSE:ANX) At This PE Ratio?
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 begin learning the link between Anaconda Mining Inc (TSE:ANX)’s fundamentals and stock market performance.
Anaconda Mining Inc (TSE:ANX) is currently trading at a trailing P/E of 23.8x, which is higher than the industry average of 11.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, 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. View out our latest analysis for Anaconda Mining
Demystifying the P/E ratio
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 ANX
Price-Earnings Ratio = Price per share ÷ Earnings per share
ANX Price-Earnings Ratio = CA$0.38 ÷ CA$0.0158 = 23.8x
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 ANX, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since ANX’s P/E of 23.8x is higher than its industry peers (11.2x), it means that investors are paying more than they should for each dollar of ANX’s earnings. Therefore, according to this analysis, ANX is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your ANX shares, 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 ANX, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ANX, 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 ANX to are fairly valued by the market. If this is violated, ANX’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on ANX, 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ANX’s future growth? Take a look at our free research report of analyst consensus for ANX’s outlook.
Past Track Record: Has ANX 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 ANX’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.
