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 Singamas Container Holdings Limited (HKG:716).
Singamas Container Holdings Limited (HKG:716) trades with a trailing P/E of 8.5x, which is lower than the industry average of 15.2x. While 716 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Singamas Container Holdings
Breaking down the Price-Earnings 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 716
Price-Earnings Ratio = Price per share ÷ Earnings per share
716 Price-Earnings Ratio = $0.15 ÷ $0.0171 = 8.5x
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 716, 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. 716’s P/E of 8.5x is lower than its industry peers (15.2x), which implies that each dollar of 716’s earnings is being undervalued by investors. Therefore, according to this analysis, 716 is an under-priced stock.
A few caveats
Before you jump to the conclusion that 716 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 716. 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 716, 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 716 to are fairly valued by the market. If this does not hold, there is a possibility that 716’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of 716 to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is 716’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.
- Past Track Record: Has 716 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 716’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 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.