China Taiping Insurance Holdings Company Limited (SEHK:966) is currently trading at a trailing P/E of 30.6x, which is higher than the industry average of 18.6x. While this makes 966 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. In this article, 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 China Taiping Insurance 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 966
Price-Earnings Ratio = Price per share ÷ Earnings per share
966 Price-Earnings Ratio = HK$32.25 ÷ HK$1.055 = 30.6x
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 966, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 30.6x, 966’s P/E is higher than its industry peers (18.6x). This implies that investors are overvaluing each dollar of 966’s earnings. Therefore, according to this analysis, 966 is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that 966 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to 966. 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 966, 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 966 to are fairly valued by the market. If this does not hold true, 966’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.