In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
New Times Energy Corporation Limited (HKG:166) is currently trading at a trailing P/E of 4.4x, which is lower than the industry average of 12.2x. While 166 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for New Times Energy
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 166
Price-Earnings Ratio = Price per share ÷ Earnings per share
166 Price-Earnings Ratio = HK$0.11 ÷ HK$0.0256 = 4.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 166, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since 166’s P/E of 4.4 is lower than its industry peers (12.2), it means that investors are paying less for each dollar of 166’s earnings. This multiple is a median of profitable companies of 24 Oil and Gas companies in HK including Chinese People Holdings, JTF International Holdings and NewOcean Energy Holdings. You can think of it like this: the market is suggesting that 166 is a weaker business than the average comparable company.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to 166. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with 166, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing 166 to are fairly valued by the market. If this does not hold true, 166’s lower P/E ratio may be because firms in our peer group are overvalued by the market.