Sino-Global Shipping America Ltd (NASDAQ:SINO) trades with a trailing P/E of 5.9x, which is lower than the industry average of 18.9x. While SINO 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Sino-Global Shipping America
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 SINO
Price-Earnings Ratio = Price per share ÷ Earnings per share
SINO Price-Earnings Ratio = $2.27 ÷ $0.384 = 5.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SINO, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. SINO’s P/E of 5.9x is lower than its industry peers (18.9x), which implies that each dollar of SINO’s earnings is being undervalued by investors. Therefore, according to this analysis, SINO is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that SINO is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to SINO, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SINO, 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 SINO to are fairly valued by the market. If this is violated, SINO’s P/E may be lower than its peers as they are actually overvalued by investors.
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.