Shineco Inc (NASDAQ:TYHT) is currently trading at a trailing P/E of 6.2x, which is lower than the industry average of 23.2x. 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. View our latest analysis for Shineco
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 TYHT
Price-Earnings Ratio = Price per share ÷ Earnings per share
TYHT Price-Earnings Ratio = $2.47 ÷ $0.398 = 6.2x
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 TYHT, 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 6.2x, TYHT’s P/E is lower than its industry peers (23.2x). This implies that investors are undervaluing each dollar of TYHT’s earnings. Therefore, according to this analysis, TYHT is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy TYHT immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to TYHT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with TYHT, 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 TYHT to are fairly valued by the market. If this does not hold true, TYHT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on TYHT, 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.
Are you a potential investor? If TYHT has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Shineco for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.