This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in AGM Group Holdings Inc (NASDAQ:AGMH).
AGM Group Holdings Inc (NASDAQ:AGMH) trades with a trailing P/E of 132.6x, which is higher than the industry average of 16x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for AGM Group Holdings
Demystifying the P/E ratio
P/E is a popular ratio used for 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for AGMH
Price per share = $25.85
Earnings per share = $0.195
∴ Price-Earnings Ratio = $25.85 ÷ $0.195 = 132.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AGMH, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 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.
Since AGMH’s P/E of 132.6x is higher than its industry peers (16x), it means that investors are paying more than they should for each dollar of AGMH’s earnings. As such, our analysis shows that AGMH represents an over-priced stock.
A few caveats
Before you jump to the conclusion that AGMH should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our “similar companies” are actually similar to AGMH. 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 AGMH, then AGMH’s P/E would naturally be higher since investors would reward AGMH’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with AGMH, AGMH’s P/E would again be higher since investors would reward AGMH’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing AGMH to are fairly valued by the market. If this assumption is violated, AGMH’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 AGMH. 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:
- Future Outlook: What are well-informed industry analysts predicting for AGMH’s future growth? Take a look at our free research report of analyst consensus for AGMH’s outlook.
- Financial Health: Is AGMH’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.