In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Sunac China Holdings Limited (HKG:1918) is currently trading at a trailing P/E of 5.9, which is close to the industry average of 5.6. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Sunac China 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. 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 1918
Price-Earnings Ratio = Price per share ÷ Earnings per share
1918 Price-Earnings Ratio = CN¥21.72 ÷ CN¥3.697 = 5.9x
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 1918, 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. Sunac China Holdings Limited (HKG:1918) trades on a trailing P/E of 5.9. This isn’t too far from the industry average (which is 5.6). This multiple is a median of profitable companies of 25 Real Estate companies in HK including Fullsun International Holdings Group, Chinney Investments and Top Spring International Holdings. One could put it like this: the market is pricing 1918 as if it is roughly average for its industry.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to 1918. If not, the difference in P/E might be a result of other factors. For example, if Sunac China Holdings Limited is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 1918 are not 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.
What this means for you:
Since you may have already conducted your due diligence on 1918, the overvaluation of the stock may mean it is a good time to reduce 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: