The Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO) share prices both experienced falls following the release of their business updates. Despite both having partially rebounded since then, they are still trading below their pre-market update prices. Given the strong historic share price performance of these 2 market darlings, could this sell off still represent an opportunity to buy for the long term? 

Altium business update 

In Altium’s most recent business update on 12 May, the company’s CEO Aram Mirkazemi commented:

As the governments of the US and Western Europe continue to wrestle with containing the virus, we believe that the prolongation of restrictions is likely to impact Altium during May and June. While engineers are actively doing prototype designs, and the electronics industry is holding up relatively well, the cash preservation priorities of small to medium size businesses are likely to affect the timing of closing sales in our typically strongest months of the year being May and especially June.

The update also went on to state that Altium is highly unlikely to achieve its long-term aspirational goal of US$200 million revenue for the full year. 

So is the Altium share price in the buy zone?

Following this disappointing yet not entirely unexpected news, the Altium share price fell a little over 5% last week before rebounding this week to close the gap to only 3% lower than its pre-market update price. Its market darling status allowed the company to avoid what could have otherwise been a more significant sell off.

The key risks facing prospective Altium investors are the company’s current expensive valuation and the unknowns regarding its May and June performance. I would personally avoid Altium shares at this point in time and wait for more concrete information regarding how it fares over the coming months. Having said that, I also believe its high profile market status could result in investors largely ignoring the company’s short-term headwinds. This may allow Altium’s share price to remain more stable during this volatile period. 

Xero’s full year earnings 

At face value, Xero delivered a strong full year result that highlighted a 30% increase in operating revenue, a 26% increase in subscribers and a maiden net profit of NZ$3.3 million. However, the company outlined the difficult times ahead for many of its clients due to the ongoing economic fallout of the coronavirus pandemic. 

Xero noted that March trading resulted in some reduction in annualised monthly recurring revenue as many of its small business customers were hit hard by COVID-19 restrictions. That said, many other fintech companies such as Afterpay Ltd (ASX: APT) and Tyro Payments Ltd (ASX: TYR) also witnessed sales and transaction values trough in March, before rebounding in April. 

Is the current Xero share price in the buy zone?

There are plenty of growth avenues and areas of planned strategic investment to support Xero’s continued success over the long term. This was outlined in its full year presentation, with key areas of strategic focus including driving cloud accounting, expanding its small business platform and building the company for global scale and innovation.

Personally, I believe its future opportunities and global expansion still make Xero an appealing long-term investment, despite its current, eye-watering valuation. 

More reading

• 3 fantastic ASX shares to buy now to get rich later
• Should you throw $3,000 into Altium shares today?
• Are Xero shares a top long-term buy?
• 2 millionaire-maker ASX internet growth shares
• Where to invest $500 in ASX shares right now

Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments and Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Do the Altium and Xero share prices still represent good long-term buys? appeared first on Motley Fool Australia.

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ASX share prices have been hit hard in 2020, and we’ve seen price to earnings (P/E) ratios plummet. The P/E ratio is a classic metric used by investors around the world to judge the relative value of different shares. But in the current climate, does the ratio tell us anything about ASX shares?

What is the price to earnings ratio?

As the name suggests, a P/E ratio is calculated by dividing a company’s share price by its earnings per share (EPS). EPS can be measured as either a trailing EPS (from the last reporting period) or a forward EPS (projected for the next reporting period). Depending on which of these is used in the denominator, we can derive either a forward P/E or trailing P/E.

Do P/E ratios tell us anything about ASX shares in 2020?

Now, ASX share prices have been hammered in 2020 which means the ‘P’ in the ratio is falling lower. On top of that, earnings look set to slump in the wake of the coronavirus pandemic and subsequent economic shutdown.

This means it’s logical that P/E ratios for ASX shares are falling across the board. This is particularly the case in the hardest-hit sectors like media and travel.

For instance, the Southern Cross Media Group Ltd (ASX: SXL) shares are trading at just 3.38 times earnings. Similarly, Flight Centre Travel Group Ltd (ASX: FLT) trades at a P/E ratio of 6.10. Webjet Limited (ASX: WEB) is trading at 15.61 times earnings which, whilst higher than Southern Cross and Flight Centre, is still lower than the S&P/ASX 200 Index (ASX: XJO) average.

Under normal circumstances, this would suggest that all three of these ASX dividend shares could be great value buys. However, thanks to COVID-19, I think the earnings component (E) will be slashed lower in 2020. The pandemic response has reduced earnings for many of these groups to a trickle of what they were in 2019. That means that P/E ratios (and dividend yields) may not help you to value your favourite ASX shares right now.

In other words, because P/E ratios are often a lagging indicator, valuing shares like Webjet, Flight Centre and Southern Cross based on this metric can be misleading. 

So… how should we value ASX shares?

If we can’t rely on P/E ratios right now, what’s the alternative? 

One quantitative option is to look at the balance sheet strength of companies instead of earnings. Low levels of debt and a strong asset base could pay dividends in the current climate. Companies with a combination of these two things are in a more stable position with less strain on their finances from other parties, like banks.

Another option is to sit tight and wait for the August earnings season. This will provide a better idea of expected and actual earnings, but it would mean staying out of the market for 3.5 months. 

Foolish takeaway

P/E ratios can be misleading at the moment, but that doesn’t make them useless. Some companies’ earnings will remain steady despite COVID-19 but I’d be treading lightly when valuing ASX shares in this market.

More reading

• Why this ASX funeral share is well positioned for future growth
• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• Positive signs for Australia’s jobs market as ABS data points to a recovery
• Is the Newcrest Mining share price in the buy zone?
• Are ASX bank shares worth buying despite dividend cuts?

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Can we value ASX shares with P/E ratios in 2020? appeared first on Motley Fool Australia.

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