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Does Huaneng Power International Inc’s (HKG:902) PE Ratio Signal A Selling Opportunity?

Heidi Stubbs

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Huaneng Power International Inc (HKG:902).

Huaneng Power International Inc (HKG:902) is currently trading at a trailing P/E of 29.3x, which is higher than the industry average of 0x. While this makes 902 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Huaneng Power International

Breaking down the Price-Earnings ratio

SEHK:902 PE PEG Gauge June 25th 18

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 902

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

902 Price-Earnings Ratio = CN¥4.49 ÷ CN¥0.153 = 29.3x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 902, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 29.3x, 902’s P/E is higher than its industry peers (14.4x). This implies that investors are overvaluing each dollar of 902’s earnings. As such, our analysis shows that 902 represents an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that 902 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to 902. 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 902, 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 902 to are fairly valued by the market. If this is violated, 902’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 902, the overvaluation of the stock may mean it is a good time to reduce 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:

  1. Future Outlook: What are well-informed industry analysts predicting for 902’s future growth? Take a look at our free research report of analyst consensus for 902’s outlook.
  2. Past Track Record: Has 902 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 902’s historicals for more clarity.
  3. 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.