Does Semiconductor Manufacturing International Corporation’s (HKG:981) PE Ratio Signal A Selling Opportunity?
Semiconductor Manufacturing International Corporation (SEHK:981) is currently trading at a trailing P/E of 22.9x, which is higher than the industry average of 16.1x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Semiconductor Manufacturing International
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 981
Price-Earnings Ratio = Price per share ÷ Earnings per share
981 Price-Earnings Ratio = $1.2 ÷ $0.052 = 22.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 981, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 981’s P/E of 22.9x is higher than its industry peers (16.1x), which implies that each dollar of 981’s earnings is being expensive by investors. Therefore, according to this analysis, 981 is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that 981 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 981. 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 981, 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 981 to are fairly valued by the market. If this does not hold true, 981’s lower P/E ratio may be because firms in our peer group are overpriced by the market.
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.
