Yahoo Finance Is Antofagasta plc’s (LON:ANTO) PE Ratio A Signal To Sell For Investors?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Antofagasta plc (LON:ANTO)’s fundamentals and stock market performance.
Antofagasta plc (LON:ANTO) trades with a trailing P/E of 17.7x, which is higher than the industry average of 13x. While ANTO 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Antofagasta
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for ANTO
Price-Earnings Ratio = Price per share ÷ Earnings per share
ANTO Price-Earnings Ratio = $13.43 ÷ $0.761 = 17.7x
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 ANTO, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. ANTO’s P/E of 17.7x is higher than its industry peers (13x), which implies that each dollar of ANTO’s earnings is being overvalued by investors. As such, our analysis shows that ANTO represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your ANTO shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ANTO. 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 ANTO, 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 ANTO to are fairly valued by the market. If this is violated, ANTO’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in ANTO. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 ANTO’s future growth? Take a look at our free research report of analyst consensus for ANTO’s outlook.
Past Track Record: Has ANTO 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 ANTO’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.
