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The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Trio-Tech International (NYSEMKT:TRT) trades with a trailing P/E of 14.2x, which is lower than the industry average of 20.8x. While TRT 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.
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 TRT
Price-Earnings Ratio = Price per share ÷ Earnings per share
TRT Price-Earnings Ratio = $4.79 ÷ $0.337 = 14.2x
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 TRT, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. TRT’s P/E of 14.2 is lower than its industry peers (20.8), which implies that each dollar of TRT’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Semiconductor companies in US including ARISE Technologies, PV Crystalox Solar and Daqo New Energy. One could put it like this: the market is pricing TRT as if it is a weaker company than the average company in its industry.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to TRT. 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 TRT, 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 TRT to are fairly valued by the market. If this does not hold, there is a possibility that TRT’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 TRT 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:
Future Outlook: What are well-informed industry analysts predicting for TRT’s future growth? Take a look at our free research report of analyst consensus for TRT’s outlook.
Past Track Record: Has TRT 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 TRT’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 email@example.com.