Should You Sell Westgold Resources Limited (ASX:WGX) At This PE Ratio?
Westgold Resources Limited (ASX:WGX) is currently trading at a trailing P/E of 180.6x, which is higher than the industry average of 12.9x. While WGX 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 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 Westgold Resources
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 WGX
Price-Earnings Ratio = Price per share ÷ Earnings per share
WGX Price-Earnings Ratio = A$1.53 ÷ A$0.008 = 180.6x
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 WGX, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. WGX’s P/E of 180.6x is higher than its industry peers (12.9x), which implies that each dollar of WGX’s earnings is being overvalued by investors. Therefore, according to this analysis, WGX is an over-priced stock.
A few caveats
Before you jump to the conclusion that WGX 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 WGX. 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 WGX, 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 WGX to are fairly valued by the market. If this does not hold true, WGX’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.
