In This Article:
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
C C Land Holdings Limited (HKG:1224) is trading with a trailing P/E of 24.8, which is higher than the industry average of 5.4. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, 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 C C Land Holdings
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 1224
Price-Earnings Ratio = Price per share ÷ Earnings per share
1224 Price-Earnings Ratio = HK$1.92 ÷ HK$0.0773 = 24.8x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 1224, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since 1224’s P/E of 24.8 is higher than its industry peers (5.4), it means that investors are paying more for each dollar of 1224’s earnings. This multiple is a median of profitable companies of 25 Real Estate companies in HK including Chinney Investments, Top Spring International Holdings and Hon Kwok Land Investment Company. You could think of it like this: the market is pricing 1224 as if it is a stronger company than the average of its industry group.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to 1224. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where C C Land 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 1224 may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.