In This Article:
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Guangdong Kanghua Healthcare Co Ltd (HKG:3689)’s fundamentals and stock market performance.
Guangdong Kanghua Healthcare Co Ltd (HKG:3689) trades with a trailing P/E of 16.1x, which is lower than the industry average of 31.4x. While 3689 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Guangdong Kanghua Healthcare
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 3689
Price-Earnings Ratio = Price per share ÷ Earnings per share
3689 Price-Earnings Ratio = CN¥7.53 ÷ CN¥0.468 = 16.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 3689, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. 3689’s P/E of 16.1x is lower than its industry peers (31.4x), which implies that each dollar of 3689’s earnings is being undervalued by investors. As such, our analysis shows that 3689 represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy 3689, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 3689. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with 3689, 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 3689 to are fairly valued by the market. If this does not hold, there is a possibility that 3689’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of 3689 to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following: