Sino-Global Shipping America Ltd (NASDAQ:SINO) is currently trading at a trailing P/E of 7.2x, which is lower than the industry average of 22.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Sino-Global Shipping America
Breaking down 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 SINO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SINO Price-Earnings Ratio = 2.93 ÷ 0.407 = 7.2x
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 SINO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. SINO’s P/E of 7.2x is lower than its industry peers (22.4x), which implies that each dollar of SINO’s earnings is being undervalued by investors. Therefore, according to this analysis, SINO is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy SINO immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SINO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with SINO, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SINO to are fairly valued by the market. If this is violated, SINO's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of SINO to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in SINO, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Sino-Global Shipping America for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.