Should You Be Tempted To Sell Avino Silver & Gold Mines Ltd (TSE:ASM) At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Avino Silver & Gold Mines Ltd (TSE:ASM)’s fundamentals and stock market performance.

Avino Silver & Gold Mines Ltd (TSE:ASM) is currently trading at a trailing P/E of 24.5x, which is higher than the industry average of 11.7x. While this makes ASM appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Avino Silver & Gold Mines

Breaking down the P/E ratio

The P/E ratio is one of many ratios used in relative valuation. 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.

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 ASM, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.

Since ASM's P/E of 24.5x is higher than its industry peers (11.7x), it means that investors are paying more than they should for each dollar of ASM's earnings. As such, our analysis shows that ASM represents an over-priced stock.

Assumptions to watch out for

While our conclusion might prompt you to sell your ASM shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ASM. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with ASM, then ASM’s P/E would naturally be higher since investors would reward ASM’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with ASM, ASM’s P/E would again be higher since investors would reward ASM’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing ASM to are fairly valued by the market. If this does not hold, there is a possibility that ASM’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ASM. 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:

1. Future Outlook: What are well-informed industry analysts predicting for ASM’s future growth? Take a look at our free research report of analyst consensus for ASM’s outlook.
2. Past Track Record: Has ASM 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 ASM's historicals for more clarity.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.