In This Article:
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
China Goldjoy Group Limited (HKG:1282) is currently trading at a trailing P/E of 7.8x, which is lower than the industry average of 8.3x. 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for China Goldjoy Group
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 1282
Price-Earnings Ratio = Price per share ÷ Earnings per share
1282 Price-Earnings Ratio = HK$0.33 ÷ HK$0.0424 = 7.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1282, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since 1282’s P/E of 7.8 is lower than its industry peers (8.3), it means that investors are paying less for each dollar of 1282’s earnings. This multiple is a median of profitable companies of 5 Tech companies in HK including PC Partner Group, Goldpac Group and Legend Holdings. You can think of it like this: the market is suggesting that 1282 is a weaker business than the average comparable company.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 1282. 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 1282, 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 1282 to are fairly valued by the market. If this is violated, 1282’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to 1282. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: