Is CSPC Pharmaceutical Group Limited’s (HKG:1093) PE Ratio A Signal To Sell For Investors?
CSPC Pharmaceutical Group Limited (SEHK:1093) trades with a trailing P/E of 41.7x, which is higher than the industry average of 18.3x. While 1093 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 CSPC Pharmaceutical Group
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 1093
Price-Earnings Ratio = Price per share ÷ Earnings per share
1093 Price-Earnings Ratio = HK$17.74 ÷ HK$0.426 = 41.7x
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 1093, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 1093’s P/E of 41.7x is higher than its industry peers (18.3x), which implies that each dollar of 1093’s earnings is being overvalued by investors. As such, our analysis shows that 1093 represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your 1093 shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to 1093, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 1093, 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 1093 to are fairly valued by the market. If this is violated, 1093’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
