Vodatel Networks Holdings Limited (SEHK:8033) is currently trading at a trailing P/E of 11.8x, which is lower than the industry average of 23.6x. While 8033 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. Today, 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 Vodatel Networks Holdings
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 8033
Price-Earnings Ratio = Price per share ÷ Earnings per share
8033 Price-Earnings Ratio = HK$0.29 ÷ HK$0.025 = 11.8x
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 8033, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 11.8x, 8033’s P/E is lower than its industry peers (23.6x). This implies that investors are undervaluing each dollar of 8033’s earnings. As such, our analysis shows that 8033 represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy 8033, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 8033. 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 8033, 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 8033 to are fairly valued by the market. If this does not hold true, 8033’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.