Chasen Holdings Limited (SGX:5NV) is currently trading at a trailing P/E of 6.5x, which is lower than the industry average of 10.4x. While 5NV 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 Chasen Holdings
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 5NV
Price-Earnings Ratio = Price per share ÷ Earnings per share
5NV Price-Earnings Ratio = SGD0.08 ÷ SGD0.012 = 6.5x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 5NV, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since 5NV’s P/E of 6.5x is lower than its industry peers (10.4x), it means that investors are paying less than they should for each dollar of 5NV’s earnings. As such, our analysis shows that 5NV represents an under-priced stock.
A few caveats
Before you jump to the conclusion that 5NV 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 5NV. 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 5NV, 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 5NV to are fairly valued by the market. If this does not hold, there is a possibility that 5NV’s P/E is lower because our peer group is 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.