Yahoo Finance Is ASA International Group PLC (LON:ASAI) Attractive At This PE Ratio?
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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
ASA International Group PLC (LON:ASAI) is currently trading at a trailing P/E of 0.9x, which is lower than the industry average of 9.6x. While this makes ASAI 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 ASA International Group
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 ASAI
Price-Earnings Ratio = Price per share ÷ Earnings per share
ASAI Price-Earnings Ratio = $6.3 ÷ $6.812 = 0.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ASAI, 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. ASAI’s P/E of 0.9 is lower than its industry peers (9.6), which implies that each dollar of ASAI’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 9 Consumer Finance companies in GB including Manx Financial Group, Arrow Global Group and H&T Group. You can think of it like this: the market is suggesting that ASAI is a weaker business than the average comparable company.
Assumptions to be aware of
However, 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 ASAI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with ASAI, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ASAI to are fairly valued by the market. If this does not hold, there is a possibility that ASAI’s P/E is lower because our peer group is overvalued by the market.
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 add more of ASAI to your portfolio. 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 ASAI’s future growth? Take a look at our free research report of analyst consensus for ASAI’s outlook.
Financial Health: Are ASAI’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.
