This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Thelloy Development Group Limited (HKG:1546).

Thelloy Development Group Limited (HKG:1546) trades with a trailing P/E of 9.5x, which is lower than the industry average of 14x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Thelloy Development Group

Breaking down 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 1546

Price-Earnings Ratio = Price per share ÷ Earnings per share

1546 Price-Earnings Ratio = HK$0.73 ÷ HK$0.0765 = 9.5x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1546, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 9.5x, 1546’s P/E is lower than its industry peers (14x). This implies that investors are undervaluing each dollar of 1546’s earnings. As such, our analysis shows that 1546 represents an under-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that 1546 is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to 1546. 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 1546, 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 1546 to are fairly valued by the market. If this does not hold true, 1546’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to 1546. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: