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# Does China New Borun Corporation’s (BORN) PE Ratio Warrant A Buy?

China New Borun Corporation (NYSE:BORN) is currently trading at a trailing P/E of 2.6x, which is lower than the industry average of 27.7x. While BORN 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for BORN

### Breaking down the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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 BORN

Price-Earnings Ratio = Price per share ÷ Earnings per share

BORN Price-Earnings Ratio = 1.28 ÷ 3.325 = 2.6x

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 BORN, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 2.6x, BORN’s P/E is lower than its industry peers (27.7x). This implies that investors are undervaluing each dollar of BORN’s earnings. As such, our analysis shows that BORN represents an under-priced stock.

### Assumptions to watch out for

Before you jump to the conclusion that BORN is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to BORN. 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 BORN, 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 BORN to are fairly valued by the market. If this does not hold, there is a possibility that BORN’s P/E is lower because our peer group is overvalued by the market.

### What this means for you:

Are you a shareholder? Since you may have already conducted your due diligence on BORN, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I've outlined above.

Are you a potential investor? If you are considering investing in BORN, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.

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 China New Borun 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.