Link Holdings Limited (SEHK:8237) trades with a trailing P/E of 198.9x, which is higher than the industry average of 18.8x. While this makes 8237 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Link Holdings
Breaking down 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 8237
Price-Earnings Ratio = Price per share ÷ Earnings per share
8237 Price-Earnings Ratio = HK$0.63 ÷ HK$0.003 = 198.9x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 8237, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 8237’s P/E of 198.9x is higher than its industry peers (18.8x), which implies that each dollar of 8237’s earnings is being overvalued by investors. As such, our analysis shows that 8237 represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your 8237 shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to 8237. 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 8237, 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 8237 to are fairly valued by the market. If this does not hold true, 8237’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.