In This Article:
Stamford Land Corporation Ltd (SGX:H07) is trading with a trailing P/E of 10.9x, which is lower than the industry average of 23.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Stamford Land
Breaking down the Price-Earnings 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 H07
Price-Earnings Ratio = Price per share ÷ Earnings per share
H07 Price-Earnings Ratio = SGD0.5 ÷ SGD0.046 = 10.9x
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 H07, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 10.9x, H07’s P/E is lower than its industry peers (23.9x). This implies that investors are undervaluing each dollar of H07’s earnings. As such, our analysis shows that H07 represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy H07 immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to H07. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with H07, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing H07 to are fairly valued by the market. If this does not hold, there is a possibility that H07’s P/E is lower because our peer group is 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.