At under 30 cents each, are these ASX lithium stocks cheap?

A man thinks very carefully about his money and investments.A man thinks very carefully about his money and investments.

There’s quite a bit of variety when it comes to the pricing of ASX lithium stocks.

There’s market-leader Pilbara Minerals Ltd (ASX: PLS), which is currently asking $4.40 a share at the time of writing:

Then there are other lithium leaders like Liontown Resources Ltd (ASX: LTR). Liontown has a lower share price than Pilbara but is still well over $1 each – $1.36 a share at the present time.

Or Core Lithium Ltd (ASX: CXO). Core Lithium is asking just under $1 a share at present, but has been as high as $1.88 in the past 12 months.

But others have far lower share prices. Take popular lithium stock Sayona Mining Ltd (ASX: SYA). Right now, Sayona is going for 22 cents a share.

Fellow lithium company Anson Resources Ltd (ASX: ASN) is trading at 19 cents per share.

And you can pick up a single share of Latin Resources Ltd (ASX: LRS) for just 13 cents.

So these last three shares are the cheap ones, right? The shares you might choose if you want the maximum upside?

Well, no.

It’s a common misconception on the share market that a lower share price equates to a ‘cheaper’ price. Sure, you can buy more shares if a share price is lower. But that’s it.

A share price is a function of two things – a company’s market capitalisation, and how many shares it has on issue. The price of those shares is entirely determined by the company’s market cap. So when you see shares moving up and down in price, what you are really seeing is a company’s market capitalisation changing.

Low-price ASX lithium stocks aren’t cheap

Let’s say a company has one million shares on issue.

If the market wants to value that company at $1 million, it will give each of its shares a share price of $1. If the company does well over time, and the market decides it is now worth $2 million, then the shares will rise to $2 each.

But then say that same company decides to issue more shares, enough to double its share count. Now there are two million shares on issue. But if the market still thinks the company should be worth $1 million, then each share will be priced at 50 cents.    

So just because Latin Resources shares are 13 cents each, doesn’t mean that it is cheaper than another ASX lithium stock like Pilbara Minerals at $4.40. It just means that Pilbara has a greater market capitalisation, with proportionally fewer shares, than Latin Resources.

If the market decides to double the value of either Latin or Piblara, investors will enjoy exactly the same monetary gain.

Just because an ASX lithium stock’s share price is numerically lower doesn’t mean it has more potential to rise over time. The only thing that matters at the end of the day is how profitable a company is, and how much value the share market places on those profits.

The post At under 30 cents each, are these ASX lithium stocks cheap? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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