In This Article:
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Veeko International Holdings Limited (HKG:1173) is trading with a trailing P/E of 76.6, which is higher than the industry average of 9.9. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Veeko International Holdings
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 1173
Price-Earnings Ratio = Price per share ÷ Earnings per share
1173 Price-Earnings Ratio = HK$0.17 ÷ HK$0.00219 = 76.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 1173, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 76.6, 1173’s P/E is higher than its industry peers (9.9). This implies that investors are overvaluing each dollar of 1173’s earnings. This multiple is a median of profitable companies of 25 Specialty Retail companies in HK including Sunfonda Group Holdings, Beijing Digital Telecom and China Harmony New Energy Auto Holding. You could think of it like this: the market is pricing 1173 as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to 1173. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Veeko International Holdings Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 1173 are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.