Yahoo Finance Is Autins Group plc’s (LON:AUTG) PE Ratio A Signal To Buy For Investors?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Autins Group plc (LON:AUTG) trades with a trailing P/E of 12.8x, which is lower than the industry average of 14x. While AUTG 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. In this article, 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 Autins Group
Breaking down 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 AUTG
Price-Earnings Ratio = Price per share ÷ Earnings per share
AUTG Price-Earnings Ratio = £0.35 ÷ £0.0276 = 12.8x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to AUTG, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AUTG’s P/E of 12.8 is lower than its industry peers (14), which implies that each dollar of AUTG’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 4 Auto Components companies in GB including 21st Century Technology, TI Fluid Systems and GKN. One could put it like this: the market is pricing AUTG as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to AUTG. 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 AUTG, 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 AUTG to are fairly valued by the market. If this does not hold, there is a possibility that AUTG’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to AUTG. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for AUTG’s future growth? Take a look at our free research report of analyst consensus for AUTG’s outlook.
Financial Health: Are AUTG’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.
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
