What Does Shanghai Fudan Microelectronics Group Company Limited’s (HKG:1385) PE Ratio Tell You?
This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Shanghai Fudan Microelectronics Group Company Limited (HKG:1385) is trading with a trailing P/E of 24.7, which is higher than the industry average of 15.9. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Shanghai Fudan Microelectronics Group
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 1385
Price-Earnings Ratio = Price per share ÷ Earnings per share
1385 Price-Earnings Ratio = CN¥7.42 ÷ CN¥0.300 = 24.7x
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 1385, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since 1385’s P/E of 24.7 is higher than its industry peers (15.9), it means that investors are paying more for each dollar of 1385’s earnings. This multiple is a median of profitable companies of 19 Semiconductor companies in HK including Wai Chi Holdings, Flat Glass Group and GCL-Poly Energy Holdings. You could think of it like this: the market is pricing 1385 as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to 1385. If not, the difference in P/E might be a result of other factors. For example, if Shanghai Fudan Microelectronics Group Company Limited is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 1385 are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to 1385. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 1385’s future growth? Take a look at our free research report of analyst consensus for 1385’s outlook.
Past Track Record: Has 1385 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 1385’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.
