China International Holdings Limited (SGX:BEH) is currently trading at a trailing P/E of 1.3x, which is lower than the industry average of 16.3x. While BEH might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for China International Holdings
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 BEH
Price-Earnings Ratio = Price per share ÷ Earnings per share
BEH Price-Earnings Ratio = CN¥2.37 ÷ CN¥1.794 = 1.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BEH, 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. BEH’s P/E of 1.3x is lower than its industry peers (16.3x), which implies that each dollar of BEH’s earnings is being undervalued by investors. Therefore, according to this analysis, BEH is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy BEH, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to BEH. 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 BEH, 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 BEH to are fairly valued by the market. If this does not hold, there is a possibility that BEH’s P/E is lower because our peer group is 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.