Should You Sell Ausdrill Limited (ASX:ASL) At This PE Ratio?
Ausdrill Limited (ASX:ASL) is currently trading at a trailing P/E of 17.4x, which is higher than the industry average of 13.8x. 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Ausdrill
Breaking down the Price-Earnings 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 ASL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ASL Price-Earnings Ratio = A$2.84 ÷ A$0.163 = 17.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 ASL, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. ASL’s P/E of 17.4x is higher than its industry peers (13.8x), which implies that each dollar of ASL’s earnings is being overvalued by investors. As such, our analysis shows that ASL represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your ASL shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ASL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ASL, 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 ASL to are fairly valued by the market. If this does not hold, there is a possibility that ASL’s P/E is lower because our peer group is 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 rebalance your portfolio and reduce your holdings in ASL. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ASL’s future growth? Take a look at our free research report of analyst consensus for ASL’s outlook.
Past Track Record: Has ASL 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 ASL’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.
