Should You Be Tempted To Buy Atrion Corporation (NASDAQ:ATRI) Because Of Its PE Ratio?
Atrion Corporation (NASDAQ:ATRI) is currently trading at a trailing P/E of 29.4x, which is lower than the industry average of 33.1x. While this makes ATRI appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Atrion
Breaking down the Price-Earnings 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 ATRI
Price-Earnings Ratio = Price per share ÷ Earnings per share
ATRI Price-Earnings Ratio = $535.4 ÷ $18.219 = 29.4x
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 ATRI, 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 ATRI’s P/E of 29.4x is lower than its industry peers (33.1x), it means that investors are paying less than they should for each dollar of ATRI’s earnings. As such, our analysis shows that ATRI represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ATRI is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ATRI. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with ATRI, 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 ATRI to are fairly valued by the market. If this is violated, ATRI’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
