This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Luks Group (Vietnam Holdings) Company Limited (HKG:366) trades with a trailing P/E of 14.3, which is higher than the industry average of 9.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Luks Group (Vietnam Holdings)
Breaking down the Price-Earnings 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 366
Price-Earnings Ratio = Price per share ÷ Earnings per share
366 Price-Earnings Ratio = HK$2.45 ÷ HK$0.171 = 14.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 366, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since 366’s P/E of 14.3 is higher than its industry peers (9.9), it means that investors are paying more for each dollar of 366’s earnings. This multiple is a median of profitable companies of 10 Basic Materials companies in HK including West China Cement, China National Building Material and China Yu Tian Holdings. You could also say that the market is suggesting that 366 is a stronger business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to 366. If this isn’t the case, the difference in P/E could be due to other factors. For example, Luks Group (Vietnam Holdings) Company 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 366 may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.