What Does Xiabuxiabu Catering Management (China) Holdings Co Ltd’s (HKG:520) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Xiabuxiabu Catering Management (China) Holdings Co Ltd (HKG:520) is trading with a trailing P/E of 26.8, which is higher than the industry average of 17.6. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Xiabuxiabu Catering Management (China) Holdings
Breaking down the Price-Earnings 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 520
Price-Earnings Ratio = Price per share ÷ Earnings per share
520 Price-Earnings Ratio = CN¥10.54 ÷ CN¥0.393 = 26.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 520, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since 520’s P/E of 26.8 is higher than its industry peers (17.6), it means that investors are paying more for each dollar of 520’s earnings. This multiple is a median of profitable companies of 25 Hospitality companies in HK including Shun Ho Holdings, Shun Ho Property Investments and Capital Estate. You could think of it like this: the market is pricing 520 as if it is a stronger company than the average of its industry group.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to 520. If not, the difference in P/E might be a result of other factors. For example, if Xiabuxiabu Catering Management (China) Holdings Co Ltd is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 520 are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 520. 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 520’s future growth? Take a look at our free research report of analyst consensus for 520’s outlook.
Past Track Record: Has 520 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 520’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 editorial-team@simplywallst.com.
