In This Article:
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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
Mega Expo Holdings Limited (HKG:1360) trades with a trailing P/E of 36.7, which is higher than the industry average of 15.5. 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Mega Expo Holdings
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 1360
Price-Earnings Ratio = Price per share ÷ Earnings per share
1360 Price-Earnings Ratio = HK$2.38 ÷ HK$0.0649 = 36.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1360, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 1360’s P/E of 36.7 is higher than its industry peers (15.5), which implies that each dollar of 1360’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 16 Media companies in HK including CMMB Vision Holdings, Dahe Media and SinoMedia Holding. You could think of it like this: the market is pricing 1360 as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to 1360. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where Mega Expo 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. We should also be aware that the stocks we are comparing to 1360 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.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to 1360. 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: