PC Partner Group Limited (SEHK:1263) is currently trading at a trailing P/E of 16.2x, which is higher than the industry average of 10.1x. While 1263 might seem like a stock to avoid or sell if you own it, 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. View our latest analysis for PC Partner Group

What you need to know about the P/E ratio

The P/E ratio is one of many ratios used in 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 1263

Price-Earnings Ratio = Price per share ÷ Earnings per share

1263 Price-Earnings Ratio = HK$5.98 ÷ HK$0.369 = 16.2x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 1263, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 16.2x, 1263’s P/E is higher than its industry peers (10.1x). This implies that investors are overvaluing each dollar of 1263’s earnings. Therefore, according to this analysis, 1263 is an over-priced stock.

A few caveats

However, before you rush out to sell your 1263 shares, 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 1263, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 1263, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing 1263 to are fairly valued by the market. If this does not hold true, 1263’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.