Is Orient Overseas (International) Limited’s (HKG:316) PE Ratio A Signal To Sell For Investors?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Orient Overseas (International) Limited (HKG:316).
Orient Overseas (International) Limited (HKG:316) trades with a trailing P/E of 41.1x, which is higher than the industry average of 14x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Orient Overseas (International)
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 316
Price-Earnings Ratio = Price per share ÷ Earnings per share
316 Price-Earnings Ratio = $9.05 ÷ $0.220 = 41.1x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 316, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 316’s P/E of 41.1x is higher than its industry peers (14x), which implies that each dollar of 316’s earnings is being overvalued by investors. Therefore, according to this analysis, 316 is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that 316 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to 316. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with 316, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing 316 to are fairly valued by the market. If this does not hold, there is a possibility that 316’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 316, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 316’s future growth? Take a look at our free research report of analyst consensus for 316’s outlook.
Past Track Record: Has 316 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 316’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 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.
