SEHK:3330 PE PEG Gauge Mar 16th 18
A common ratio used for relative valuation is the P/E ratio. 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 3330
Price-Earnings Ratio = Price per share ÷ Earnings per share
3330 Price-Earnings Ratio = CN¥1.4 ÷ CN¥0.07 = 20x
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 3330, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 20x, 3330’s P/E is higher than its industry peers (12.2x). This implies that investors are overvaluing each dollar of 3330’s earnings. Therefore, according to this analysis, 3330 is an over-priced stock.
A few caveats
However, before you rush out to sell your 3330 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to 3330, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with 3330, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing 3330 to are fairly valued by the market. If this does not hold, there is a possibility that 3330’s P/E is lower because our peer group is 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.