APQ Global Limited (AIM:APQ) is trading with a trailing P/E of 89.4x, which is higher than the industry average of 15.9x. While APQ might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for APQ Global
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 pound of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for APQ
Price per share = £0.95
Earnings per share = £0.011
∴ Price-Earnings Ratio = £0.95 ÷ £0.011 = 89.4x
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 APQ, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
APQ’s P/E of 89.4x is higher than its industry peers (15.9x), which implies that each dollar of APQ’s earnings is being overvalued by investors. Therefore, according to this analysis, APQ is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your APQ shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to APQ. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing riskier firms with APQ, then APQ’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with APQ. In this case, APQ’s P/E would be higher since investors would also reward APQ’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing APQ to are fairly valued by the market. If this assumption is violated, APQ’s P/E may be higher than its peers because its peers are actually undervalued by investors.
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 APQ. 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is APQ’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.