Yahoo Finance What Does Magellan Aerospace Corporation’s (TSE:MAL) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Magellan Aerospace Corporation (TSE:MAL) trades with a trailing P/E of 11.8x, which is lower than the industry average of 19x. While MAL 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 explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Magellan Aerospace
Demystifying the P/E 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 MAL
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAL Price-Earnings Ratio = CA$18.72 ÷ CA$1.593 = 11.8x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MAL, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. MAL’s P/E of 11.8 is lower than its industry peers (19), which implies that each dollar of MAL’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 4 Aerospace & Defense companies in CA including Bluedrop Performance Learning, Maxar Technologies and CAE. One could put it like this: the market is pricing MAL as if it is a weaker company than the average company in its industry.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MAL. 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 MAL, 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 MAL to are fairly valued by the market. If this does not hold, there is a possibility that MAL’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 MAL 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 MAL’s future growth? Take a look at our free research report of analyst consensus for MAL’s outlook.
Past Track Record: Has MAL 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 MAL’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.
