Does Sunny Optical Technology (Group) Company Limited’s (HKG:2382) PE Ratio Signal A Selling Opportunity?
Sunny Optical Technology (Group) Company Limited (SEHK:2382) trades with a trailing P/E of 36.7x, which is higher than the industry average of 9.8x. While 2382 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Sunny Optical Technology (Group)
Demystifying 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 2382
Price-Earnings Ratio = Price per share ÷ Earnings per share
2382 Price-Earnings Ratio = CN¥98.03 ÷ CN¥2.668 = 36.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 2382, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. 2382’s P/E of 36.7x is higher than its industry peers (9.8x), which implies that each dollar of 2382’s earnings is being overvalued by investors. As such, our analysis shows that 2382 represents an over-priced stock.
A few caveats
Before you jump to the conclusion that 2382 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 2382. 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 2382, 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 2382 to are fairly valued by the market. If this is violated, 2382’s P/E may be lower than its peers as they are actually overvalued by investors.
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 rebalance your portfolio and reduce your holdings in 2382. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for 2382’s future growth? Take a look at our free research report of analyst consensus for 2382’s outlook.
Past Track Record: Has 2382 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 2382’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.
