In This Article:
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in DYNAM JAPAN HOLDINGS Co Ltd (HKG:6889).
DYNAM JAPAN HOLDINGS Co Ltd (HKG:6889) is trading with a trailing P/E of 10.2x, which is lower than the industry average of 18.5x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for DYNAM JAPAN HOLDINGS
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 6889
Price-Earnings Ratio = Price per share ÷ Earnings per share
6889 Price-Earnings Ratio = ¥145.17 ÷ ¥14.191 = 10.2x
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 6889, 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 6889’s P/E of 10.2x is lower than its industry peers (18.5x), it means that investors are paying less than they should for each dollar of 6889’s earnings. Therefore, according to this analysis, 6889 is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy 6889, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to 6889, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 6889, 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 6889 to are fairly valued by the market. If this is violated, 6889’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 6889. 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: