KAZ Minerals plc (LSE:KAZ) is currently trading at a trailing P/E of 16.7x, which is higher than the industry average of 11x. While KAZ might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for KAZ Minerals
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 pound of the company’s earnings.
P/E Calculation for KAZ
Price-Earnings Ratio = Price per share ÷ Earnings per share
KAZ Price-Earnings Ratio = 8.2 ÷ 0.647 = 16.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as KAZ, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since KAZ's P/E of 16.7x is higher than its industry peers (11x), it means that investors are paying more than they should for each dollar of KAZ's earnings. As such, our analysis shows that KAZ represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your KAZ 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 KAZ, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with KAZ, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing KAZ to are fairly valued by the market. If this does not hold, there is a possibility that KAZ’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on KAZ, 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.
Are you a potential investor? If KAZ has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on KAZ Minerals for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.