In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
A & S Group (Holdings) Limited (HKG:1737) trades with a trailing P/E of 11.5, which is higher than the industry average of 8.2. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, 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 A & S Group (Holdings)
Breaking down the P/E 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 1737
Price-Earnings Ratio = Price per share ÷ Earnings per share
1737 Price-Earnings Ratio = HK$0.18 ÷ HK$0.0159 = 11.5x
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 1737, 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. At 11.5, 1737’s P/E is higher than its industry peers (8.2). This implies that investors are overvaluing each dollar of 1737’s earnings. This multiple is a median of profitable companies of 11 Logistics companies in HK including Wan Leader International, Changan Minsheng APLL Logistics and Guangdong Yueyun Transportation. You could think of it like this: the market is pricing 1737 as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to 1737. If this isn’t the case, the difference in P/E could be due to other factors. For example, A & S Group (Holdings) Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to 1737 may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.