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Northern Star Resources Limited ( ASX:NST ) trades with a trailing P/E of 18.4x, which is higher than the industry average of 14.9x. While NST 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. 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 Northern Star Resources Breaking down the P/E ratio ASX:NST PE PEG Gauge Feb 1st 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. P/E Calculation for NST Price-Earnings Ratio = Price per share ÷ Earnings per share NST Price-Earnings Ratio = A$5.79 ÷ A$0.315 = 18.4x 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 NST, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 18.4x, NST’s P/E is higher than its industry peers (14.9x). This implies that investors are overvaluing each dollar of NST’s earnings. Therefore, according to this analysis, NST is an over-priced stock. A few caveats While our conclusion might prompt you to sell your NST shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to NST, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with NST, 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 NST to are fairly valued by the market. If this does not hold true, NST’s lower P/E ratio may be because firms in our peer group are overvalued by the market. To help readers see pass 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. View comments
The Evolution of Generative AI: From Exploration to Integration
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