Does China Sunsine Chemical Holdings Ltd’s (SGX:CH8) PE Ratio Signal A Buying Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
China Sunsine Chemical Holdings Ltd (SGX:CH8) trades with a trailing P/E of 4.3x, which is lower than the industry average of 14.6x. 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. In this article, 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 China Sunsine Chemical Holdings
What you need to know about 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 CH8
Price-Earnings Ratio = Price per share ÷ Earnings per share
CH8 Price-Earnings Ratio = CN¥5.29 ÷ CN¥1.218 = 4.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CH8, 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 4.3, CH8’s P/E is lower than its industry peers (14.6). This implies that investors are undervaluing each dollar of CH8’s earnings. This multiple is a median of profitable companies of 5 Chemicals companies in SG including Chemical Industries (Far East), Meghmani Organics and Dynamic Colours. One could put it like this: the market is pricing CH8 as if it is a weaker company than the average company in its industry.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to CH8. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CH8, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CH8 to are fairly valued by the market. If this is violated, CH8’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on CH8, 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. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CH8’s future growth? Take a look at our free research report of analyst consensus for CH8’s outlook.
Past Track Record: Has CH8 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 CH8’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.
