The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Applied Industrial Technologies Inc (NYSE:AIT)’s fundamentals and stock market performance.
Applied Industrial Technologies Inc (NYSE:AIT) is currently trading at a trailing P/E of 19x, which is higher than the industry average of 14.6x. While AIT 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Applied Industrial Technologies
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 AIT
Price-Earnings Ratio = Price per share ÷ Earnings per share
AIT Price-Earnings Ratio = $75.45 ÷ $3.971 = 19x
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 AIT, 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 19x, AIT’s P/E is higher than its industry peers (14.6x). This implies that investors are overvaluing each dollar of AIT’s earnings. Therefore, according to this analysis, AIT is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your AIT 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 AIT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with AIT, 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 AIT to are fairly valued by the market. If this does not hold, there is a possibility that AIT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on AIT, 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. 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:
- Future Outlook: What are well-informed industry analysts predicting for AIT’s future growth? Take a look at our free research report of analyst consensus for AIT’s outlook.
- Past Track Record: Has AIT 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 AIT’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.