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The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Oi Wah Pawnshop Credit Holdings Limited (HKG:1319) is trading with a trailing P/E of 6.9, which is close to the industry average of 6.9. 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.
Check out our latest analysis for Oi Wah Pawnshop Credit Holdings
Breaking down 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 1319
Price-Earnings Ratio = Price per share ÷ Earnings per share
1319 Price-Earnings Ratio = HK$0.33 ÷ HK$0.0476 = 6.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 1319, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Oi Wah Pawnshop Credit Holdings Limited (HKG:1319) is trading with a trailing P/E of 6.9, which is close to the industry average of 6.9. This multiple is a median of profitable companies of 16 Consumer Finance companies in HK including Vongroup, Zuoli Kechuang Micro-Finance and Allied Group. You can think of it like this: the market is suggesting that 1319 has similar prospects to its peers in the same industry.
Assumptions to watch out for
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to 1319, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 1319, 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 1319 to are fairly valued by the market. If this does not hold true, 1319’s lower P/E ratio may be because firms in our peer group are overvalued by the market.