Yahoo Finance Does Andrew Peller Limited’s (TSE:ADW.A) PE Ratio Warrant A Buy?
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.
Andrew Peller Limited (TSE:ADW.A) is currently trading at a trailing P/E of 24.5, which is close to the industry average of 24.9. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
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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 ADW.A
Price-Earnings Ratio = Price per share ÷ Earnings per share
ADW.A Price-Earnings Ratio = CA$16.36 ÷ CA$0.667 = 24.5x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ADW.A, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Andrew Peller Limited (TSE:ADW.A) trades on a trailing P/E of 24.5. This isn’t too far from the industry average (which is 24.9). This multiple is a median of profitable companies of 5 Beverage companies in CA including Molson Coors Canada, Corby Spirit and Wine and Russell Breweries. One could put it like this: the market is pricing ADW.A as if it is roughly average for 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 ADW.A. 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 ADW.A, 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 ADW.A to are fairly valued by the market. If this is violated, ADW.A’s P/E may be lower than its peers as they are actually overvalued by investors.
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 ADW.A. 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:
Financial Health: Are ADW.A’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.
Past Track Record: Has ADW.A 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 ADW.A’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 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.
