Should You Be Tempted To Buy ATA Inc (NASDAQ:ATAI) At Its Current PE Ratio?
ATA Inc (NASDAQ:ATAI) trades with a trailing P/E of 13.8x, which is lower than the industry average of 23.8x. While ATAI might seem like an attractive stock to buy, 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. View our latest analysis for ATA
Demystifying 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 ATAI
Price-Earnings Ratio = Price per share ÷ Earnings per share
ATAI Price-Earnings Ratio = CN¥32.73 ÷ CN¥2.38 = 13.8x
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 ATAI, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 13.8x, ATAI’s P/E is lower than its industry peers (23.8x). This implies that investors are undervaluing each dollar of ATAI’s earnings. As such, our analysis shows that ATAI represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy ATAI, 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 ATAI, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ATAI, 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 ATAI to are fairly valued by the market. If this does not hold true, ATAI’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on ATAI, the undervaluation of the stock may mean it is a good time to top up on 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:
Financial Health: Is ATAI’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has ATAI 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 ATAI’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.
