Hotel Properties Limited (SGX:H15) is currently trading at a trailing P/E of 17.6x, which is lower than the industry average of 27.1x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Hotel Properties
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 H15
Price-Earnings Ratio = Price per share ÷ Earnings per share
H15 Price-Earnings Ratio = SGD3.83 ÷ SGD0.217 = 17.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 H15, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. H15’s P/E of 17.6x is lower than its industry peers (27.1x), which implies that each dollar of H15’s earnings is being undervalued by investors. Therefore, according to this analysis, H15 is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy H15, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to H15. 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 H15, 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 H15 to are fairly valued by the market. If this does not hold, there is a possibility that H15’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.