Does Hexindai Inc’s (NASDAQ:HX) PE Ratio Signal A Buying Opportunity?
Hexindai Inc (NASDAQ:HX) is currently trading at a trailing P/E of 10.3x, which is lower than the industry average of 15.2x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Hexindai
Breaking down the Price-Earnings 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 HX
Price-Earnings Ratio = Price per share ÷ Earnings per share
HX Price-Earnings Ratio = $12.38 ÷ $1.203 = 10.3x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to HX, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 10.3x, HX’s P/E is lower than its industry peers (15.2x). This implies that investors are undervaluing each dollar of HX’s earnings. As such, our analysis shows that HX represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that HX 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 HX. 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 HX, 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 HX to are fairly valued by the market. If this does not hold, there is a possibility that HX’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on HX, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HX’s future growth? Take a look at our free research report of analyst consensus for HX’s outlook.
Financial Health: Is HX’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
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 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.
