Is Fuling Global Inc’s (NASDAQ:FORK) PE Ratio A Signal To Buy For Investors?
Fuling Global Inc (NASDAQ:FORK) is trading with a trailing P/E of 10x, which is lower than the industry average of 15.7x. While this makes FORK appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Fuling Global
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 FORK
Price-Earnings Ratio = Price per share ÷ Earnings per share
FORK Price-Earnings Ratio = $4 ÷ $0.398 = 10x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to FORK, 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 FORK’s P/E of 10x is lower than its industry peers (15.7x), it means that investors are paying less than they should for each dollar of FORK’s earnings. Therefore, according to this analysis, FORK is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy FORK immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FORK, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with FORK, 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 FORK to are fairly valued by the market. If this does not hold, there is a possibility that FORK’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to FORK. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:
Financial Health: Is FORK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
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.
