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Is It Time To Sell KAZ Minerals plc (LON:KAZ) Based Off Its PE Ratio?

Mercedes Harden

KAZ Minerals plc (LSE:KAZ) trades with a trailing P/E of 18.1x, which is higher than the industry average of 12x. 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for KAZ Minerals

What you need to know about the P/E ratio

LSE:KAZ PE PEG Gauge Feb 18th 18

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 = $11.74 ÷ $0.647 = 18.1x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to KAZ, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since KAZ’s P/E of 18.1x is higher than its industry peers (12x), 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. Firstly, our peer group contains companies that are similar to KAZ. 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 KAZ, 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 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.

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.