While endorsements by Elon Musk or WallStreetBets may appear to carry more weight for financial assets in 2021, the P/E ratio remains one of the easiest ways to value an ASX stock.

The P/E ratio values a company on the basis of its total earnings. A company with shares at $25 per share but earnings of $1 per share has a P/E ratio of 25.

It is common to assert a company is over- or undervalued compared to its peers, sometimes in a market index or at other times in an individual sector.

According to Market Index the average ASX 200 P/E ratio is 25.63 so the hypothetical company in this case might be considered slightly undervalued.

Of course the P/E ratio is just one of several ways to assess an ASX stock and there are many ways a company’s earnings could be impacted, but if companies are in a similar position and their P/E ratios are different it could be a sign a company is over- or undervalued.

 

Examples of how to use the P/E ratio to assess ASX stocks

Take the two big supermarkets for instance – Coles (ASX:COL) has a P/E ratio of 23 while Woolworths’ (ASX:WOW) is 31.92.

It might be possible to conclude that either Woolworths is overvalued or Coles is undervalued and share prices might move accordingly.

Another example is the ASX’s two major pathology providers. Sonic (ASX:SHL) has a P/E ratio of 14.05 while Healius (ASX:HLS) has 44.61.

Both of these companies have substantially benefited from COVID-19 because they provide testing. While Sonic has seen the greater profit, Healius has seen the greater share price gain and it might be possible to conclude that either Healius is overvalued and will fall or that Sonic is undervalued and will rise.

Nonetheless, there are other factors to consider when valuing a company and one should consider the sustainability of these earnings – which in these companies’ cases have been boosted by COVID-19 tests.

And of course if your company is not generating earnings you cannot use this metric.

But Stockhead has compiled a list of ASX companies which generate earnings and has calculated their P/E ratio.

 

Here’s a list of (earnings positive) ASX stocks by P/E ratio…

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The ASX stock with the highest P/E ratio is high end fashion outlet Cettire (ASX:CTT) with a P/E ratio of over 3,000.

Cettire listed at the back end of last year at only 50 cents and is now over $4 which capitalises the business at well over $1.6 billion. While its revenue soared in FY21 and beat prospectus estimates, it is still only $92.4 million and it made a net loss of $251,000.

A significant portion of the top 50 businesses are tech businesses including Altium (ASX:ALU), WiseTech (ASX:WTC), Class (ASX:CL1),  Hub 24 (ASX:HUB) and NetWealth (ASX:NWL).

Other stocks with high P/E ratios right now include Adore Beauty (ASX:ABY), Kogan (ASX:KGN) and Australian Ethical (ASX:AEF).

On the flip side, stocks with lower P/E ratios include property stocks, industrials and financials (other than the banks).

Examples include Humm (ASX:HUM), Peter Warren (ASX:PWR), Pepper Money (ASX:PPM), Kina Securities (ASX:KSL) and DDH1 (ASX:DDH).