Does Yangzijiang Shipbuilding (Holdings) Ltd’s (SGX:BS6) PE Ratio Warrant A Buy?
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.
Yangzijiang Shipbuilding (Holdings) Ltd (SGX:BS6) is currently trading at a trailing P/E of 8.3x, which is lower than the industry average of 10.2x. While BS6 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Yangzijiang Shipbuilding (Holdings)
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BS6
Price-Earnings Ratio = Price per share ÷ Earnings per share
BS6 Price-Earnings Ratio = CN¥6.59 ÷ CN¥0.794 = 8.3x
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 BS6, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since BS6’s P/E of 8.3 is lower than its industry peers (10.2), it means that investors are paying less for each dollar of BS6’s earnings. This multiple is a median of profitable companies of 13 Machinery companies in SG including Grand Banks Yachts, Spindex Industries and InnoTek. You can think of it like this: the market is suggesting that BS6 is a weaker business than the average comparable company.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BS6, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BS6, 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 BS6 to are fairly valued by the market. If this does not hold true, BS6’s lower P/E ratio may be because firms in our peer group are 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 BS6 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BS6’s future growth? Take a look at our free research report of analyst consensus for BS6’s outlook.
Past Track Record: Has BS6 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 BS6’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.
