This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
ZH International Holdings Limited (HKG:185) is currently trading at a trailing P/E of 7.8, which is higher than the industry average of 5.8. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for ZH International Holdings
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 185
Price-Earnings Ratio = Price per share ÷ Earnings per share
185 Price-Earnings Ratio = HK$0.25 ÷ HK$0.0318 = 7.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 185, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 185’s P/E of 7.8 is higher than its industry peers (5.8), which implies that each dollar of 185’s earnings is being overvalued by investors. 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. You could think of it like this: the market is pricing 185 as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to 185. If not, the difference in P/E might be a result of other factors. For example, if ZH International 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 185 are not fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.