Swire Properties Limited (SEHK:1972) is currently trading at a trailing P/E of 4.7x, which is lower than the industry average of 6.9x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Swire Properties
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 1972
Price-Earnings Ratio = Price per share ÷ Earnings per share
1972 Price-Earnings Ratio = HK$27.5 ÷ HK$5.805 = 4.7x
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 1972, 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. Since 1972’s P/E of 4.7x is lower than its industry peers (6.9x), it means that investors are paying less than they should for each dollar of 1972’s earnings. Therefore, according to this analysis, 1972 is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy 1972 immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to 1972. 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 1972, 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 1972 to are fairly valued by the market. If this does not hold, there is a possibility that 1972’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 1972, the undervaluation of the stock may mean it is a good time to top up on 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for 1972’s future growth? Take a look at our free research report of analyst consensus for 1972’s outlook.
- Past Track Record: Has 1972 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 1972’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.