Does Centurion Corporation Limited’s (SGX:OU8) PE Ratio Signal A Selling Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Centurion Corporation Limited (SGX:OU8) is currently trading at a trailing P/E of 11.3, which is higher than the industry average of 10.2. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for Centurion
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 OU8
Price-Earnings Ratio = Price per share ÷ Earnings per share
OU8 Price-Earnings Ratio = SGD0.43 ÷ SGD0.0380 = 11.3x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to OU8, 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. OU8’s P/E of 11.3 is higher than its industry peers (10.2), which implies that each dollar of OU8’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 24 Real Estate companies in SG including Heeton Holdings, Hong Fok and CWG International. You could think of it like this: the market is pricing OU8 as if it is a stronger company than the average of its industry group.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to OU8. If not, the difference in P/E might be a result of other factors. For example, Centurion Corporation Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with OU8 are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in OU8. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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:
Future Outlook: What are well-informed industry analysts predicting for OU8’s future growth? Take a look at our free research report of analyst consensus for OU8’s outlook.
Past Track Record: Has OU8 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of OU8’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
