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This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between G & M Holdings Limited (HKG:6038)’s fundamentals and stock market performance.
G & M Holdings Limited (HKG:6038) trades with a trailing P/E of 7.6x, which is lower than the industry average of 14x. While 6038 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for G & M Holdings
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 6038
Price-Earnings Ratio = Price per share ÷ Earnings per share
6038 Price-Earnings Ratio = HK$0.45 ÷ HK$0.0588 = 7.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 6038, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 7.6x, 6038’s P/E is lower than its industry peers (14x). This implies that investors are undervaluing each dollar of 6038’s earnings. Therefore, according to this analysis, 6038 is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy 6038 immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to 6038, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with 6038, 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 6038 to are fairly valued by the market. If this does not hold true, 6038’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 6038, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 urge you to complete your research by taking a look at the following: