This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Tuan Sing Holdings Limited (SGX:T24)’s fundamentals and stock market performance.

Tuan Sing Holdings Limited (SGX:T24) is trading with a trailing P/E of 7.9x, which is lower than the industry average of 9.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Tuan Sing Holdings

Demystifying the P/E ratio

P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as 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 = SGD0.43 ÷ SGD0.0553 = 7.9x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to T24, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 7.9x, T24’s P/E is lower than its industry peers (9.4x). This implies that investors are undervaluing each dollar of T24’s earnings. As such, our analysis shows that T24 represents an under-priced stock.

Assumptions to be aware of

However, before you rush out to buy T24, it is important to note that this conclusion is based on two key assumptions. 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 lower risk firms with T24, 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 T24 to are fairly valued by the market. If this does not hold, there is a possibility that T24’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

Since you may have already conducted your due diligence on T24, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 highly recommend you to complete your research by taking a look at the following: