Tuan Sing Holdings Limited (SGX:T24) is trading with a trailing P/E of 9.1x, which is lower than the industry average of 11.6x. While this makes T24 appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Tuan Sing Holdings

Breaking down the Price-Earnings ratio

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 T24

Price-Earnings Ratio = Price per share ÷ Earnings per share

T24 Price-Earnings Ratio = SGD0.48 ÷ SGD0.053 = 9.1x

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 T24, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since T24’s P/E of 9.1x is lower than its industry peers (11.6x), it means that investors are paying less than they should for each dollar of T24’s earnings. As such, our analysis shows that T24 represents an under-priced stock.

A few caveats

Before you jump to the conclusion that T24 is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to T24. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with T24, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing T24 to are fairly valued by the market. If this does not hold true, T24’s lower P/E ratio may be because firms in our peer group are 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.