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Does Mineral Commodities Ltd’s (ASX:MRC) PE Ratio Warrant A Buy?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.

Mineral Commodities Ltd (ASX:MRC) trades with a trailing P/E of 9x, which is lower than the industry average of 12.3x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

See our latest analysis for Mineral Commodities

Demystifying the P/E ratio

ASX:MRC PE PEG Gauge September 24th 18
ASX:MRC PE PEG Gauge September 24th 18

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.

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P/E Calculation for MRC

Price-Earnings Ratio = Price per share ÷ Earnings per share

MRC Price-Earnings Ratio = $0.12 ÷ $0.0138 = 9x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MRC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since MRC’s P/E of 9 is lower than its industry peers (12.3), it means that investors are paying less for each dollar of MRC’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in AU including Gladiator Resources, Aeris Resources and Citigold. You can think of it like this: the market is suggesting that MRC is a weaker business than the average comparable company.

Assumptions to be aware of

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 MRC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with MRC, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing MRC to are fairly valued by the market. If this is violated, MRC’s P/E may be lower than its peers as they are actually overvalued by investors.

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 MRC 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:

  1. Future Outlook: What are well-informed industry analysts predicting for MRC’s future growth? Take a look at our free research report of analyst consensus for MRC’s outlook.

  2. Past Track Record: Has MRC 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 MRC’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.

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.