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Qian Hu Corporation Limited (SGX:BCV) is currently trading at a trailing P/E of 69x, which is higher than the industry average of 21.6x. While this makes BCV 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 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 Qian Hu
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 BCV
Price-Earnings Ratio = Price per share ÷ Earnings per share
BCV Price-Earnings Ratio = SGD0.2 ÷ SGD0.003 = 69x
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 BCV, 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. Since BCV’s P/E of 69x is higher than its industry peers (21.6x), it means that investors are paying more than they should for each dollar of BCV’s earnings. As such, our analysis shows that BCV represents an over-priced stock.
A few caveats
Before you jump to the conclusion that BCV should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BCV, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BCV, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing BCV to are fairly valued by the market. If this does not hold true, BCV’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.