Is Haier Electronics Group Co Ltd.’s (HKG:1169) PE Ratio A Signal To Sell For Investors?
Haier Electronics Group Co Ltd. (SEHK:1169) trades with a trailing P/E of 18.6x, which is higher than the industry average of 13.2x. While this makes 1169 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Haier Electronics Group
Breaking down 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 1169
Price-Earnings Ratio = Price per share ÷ Earnings per share
1169 Price-Earnings Ratio = CN¥22.43 ÷ CN¥1.206 = 18.6x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1169, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 1169’s P/E of 18.6x is higher than its industry peers (13.2x), which implies that each dollar of 1169’s earnings is being overvalued by investors. As such, our analysis shows that 1169 represents an over-priced stock.
A few caveats
Before you jump to the conclusion that 1169 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to 1169, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 1169, 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 1169 to are fairly valued by the market. If this does not hold, there is a possibility that 1169’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.
