Winha Commerce and Trade International Limited (ASX:WQW) is currently trading at a trailing P/E of 4x, which is lower than the industry average of 22.3x. While WQW 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. See our latest analysis for WQW
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 WQW
Price-Earnings Ratio = Price per share ÷ Earnings per share
WQW Price-Earnings Ratio = 0.6 ÷ 0.15 = 4x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to WQW, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 4x, WQW’s P/E is lower than its industry peers (22.3x). This implies that investors are undervaluing each dollar of WQW’s earnings. Therefore, according to this analysis, WQW is an under-priced stock.
A few caveats
However, before you rush out to buy WQW, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to WQW. 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 WQW, 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 WQW to are fairly valued by the market. If this does not hold true, WQW’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 WQW 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.
Are you a potential investor? If you are considering investing in WQW, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.