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Zijin Mining Group Company Limited (SEHK:2899) is currently trading at a trailing P/E of 18x, which is higher than the industry average of 13.1x. While this makes 2899 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, 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 Zijin Mining Group
Demystifying 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 2899
Price-Earnings Ratio = Price per share ÷ Earnings per share
2899 Price-Earnings Ratio = CN¥2.81 ÷ CN¥0.156 = 18x
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 2899, 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 18x, 2899’s P/E is higher than its industry peers (13.1x). This implies that investors are overvaluing each dollar of 2899’s earnings. Therefore, according to this analysis, 2899 is an over-priced stock.
A few caveats
However, before you rush out to sell your 2899 shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 2899. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with 2899, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing 2899 to are fairly valued by the market. If this does not hold true, 2899’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.