Zall Group Ltd (SEHK:2098) is trading with a trailing P/E of 53.8x, which is higher than the industry average of 9.1x. While this makes 2098 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Zall Group
What you need to know about 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 2098
Price-Earnings Ratio = Price per share ÷ Earnings per share
2098 Price-Earnings Ratio = CN¥8.29 ÷ CN¥0.154 = 53.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 2098, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 53.8x, 2098’s P/E is higher than its industry peers (9.1x). This implies that investors are overvaluing each dollar of 2098’s earnings. Therefore, according to this analysis, 2098 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your 2098 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 2098. 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 2098, 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 2098 to are fairly valued by the market. If this does not hold, there is a possibility that 2098’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.