AGM Group Holdings Inc (NASDAQ:AGMH) is trading with a trailing P/E of 51.7x, which is higher than the industry average of 31.3x. 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for AGM Group Holdings
What you need to know about 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 dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for AGMH
Price per share = $10.07
Earnings per share = $0.195
∴ Price-Earnings Ratio = $10.07 ÷ $0.195 = 51.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with 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 common peer group is companies that exist in the same industry, which is what I use below. 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.
At 51.7x, AGMH’s P/E is higher than its industry peers (31.3x). This implies that investors are overvaluing each dollar of AGMH’s earnings. Therefore, according to this analysis, AGMH is an over-priced stock.
Assumptions to be aware of
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 peer group actually contains companies that are similar to AGMH. If this isn’t the case, the difference in P/E could be due to some 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 does not hold, there is a possibility that AGMH’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
Since you may have already conducted your due diligence on AGMH, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:
- 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.
- Valuation: What is AGMH worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AGMH is currently mispriced by the market.
- 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.