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CITIC Telecom International Holdings Limited (SEHK:1883) trades with a trailing P/E of 9.2x, which is lower than the industry average of 12.4x. 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for CITIC Telecom International Holdings
Breaking down the P/E 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 1883
Price-Earnings Ratio = Price per share ÷ Earnings per share
1883 Price-Earnings Ratio = HK$2.3 ÷ HK$0.249 = 9.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 1883, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since 1883’s P/E of 9.2x is lower than its industry peers (12.4x), it means that investors are paying less than they should for each dollar of 1883’s earnings. Therefore, according to this analysis, 1883 is an under-priced stock.
A few caveats
Before you jump to the conclusion that 1883 is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to 1883, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 1883, 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 1883 to are fairly valued by the market. If this is violated, 1883’s P/E may be lower than its peers as they are actually overvalued by investors.
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.