In This Article:
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 Sing Tao News Corporation Limited (HKG:1105).
Sing Tao News Corporation Limited (HKG:1105) is currently trading at a trailing P/E of 20.3x, which is higher than the industry average of 17.8x. While this makes 1105 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. View out our latest analysis for Sing Tao News
Demystifying 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 1105
Price-Earnings Ratio = Price per share ÷ Earnings per share
1105 Price-Earnings Ratio = HK$0.97 ÷ HK$0.0477 = 20.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1105, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. 1105’s P/E of 20.3x is higher than its industry peers (17.8x), which implies that each dollar of 1105’s earnings is being overvalued by investors. Therefore, according to this analysis, 1105 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your 1105 shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 1105. 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 1105, 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 1105 to are fairly valued by the market. If this is violated, 1105’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on 1105, 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: