Does United Industrial Corporation Limited’s (SGX:U06) PE Ratio Warrant A Sell?
United Industrial Corporation Limited (SGX:U06) is currently trading at a trailing P/E of 15.3x, which is higher than the industry average of 9.9x. While U06 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. See our latest analysis for United Industrial
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 U06
Price-Earnings Ratio = Price per share ÷ Earnings per share
U06 Price-Earnings Ratio = SGD3.22 ÷ SGD0.211 = 15.3x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to U06, 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. Since U06’s P/E of 15.3x is higher than its industry peers (9.9x), it means that investors are paying more than they should for each dollar of U06’s earnings. As such, our analysis shows that U06 represents an over-priced stock.
A few caveats
However, before you rush out to sell your U06 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to U06, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with U06, 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 U06 to are fairly valued by the market. If this does not hold, there is a possibility that U06’s P/E is lower because our peer group is overvalued by the market.
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.
