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Is Pingtan Marine Enterprise Ltd (NASDAQ:PME) Attractive At Its Current PE Ratio?

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.

Pingtan Marine Enterprise Ltd (NASDAQ:PME) trades with a trailing P/E of 12.3x, which is lower than the industry average of 17.9x. While PME 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. 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 Pingtan Marine Enterprise

Demystifying the P/E ratio

NasdaqCM:PME PE PEG Gauge October 3rd 18

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 PME

Price-Earnings Ratio = Price per share ÷ Earnings per share

PME Price-Earnings Ratio = $2.28 ÷ $0.185 = 12.3x

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 PME, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. PME’s P/E of 12.3 is lower than its industry peers (17.9), which implies that each dollar of PME’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Food companies in US including Kaibo Foods, China Modern Agricultural Information and Amira Nature Foods. One could put it like this: the market is pricing PME as if it is a weaker company than the average company in its industry.

Assumptions to watch out for

Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to PME. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PME, 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 PME to are fairly valued by the market. If this is violated, PME’s P/E may be lower than its peers as they are actually overvalued by investors.

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 PME. 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 highly recommend you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for PME’s future growth? Take a look at our free research report of analyst consensus for PME’s outlook.
  2. Past Track Record: Has PME 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 PME’s historicals for more clarity.
  3. 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.