Should You Be Tempted To Buy China Cinda Asset Management Co Ltd. (HKG:1359) Because Of Its PE Ratio?
China Cinda Asset Management Co Ltd. (SEHK:1359) trades with a trailing P/E of 5.2x, which is lower than the industry average of 13.6x. While this makes 1359 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for China Cinda Asset Management
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 1359
Price-Earnings Ratio = Price per share ÷ Earnings per share
1359 Price-Earnings Ratio = CN¥2.33 ÷ CN¥0.447 = 5.2x
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 1359, 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. At 5.2x, 1359’s P/E is lower than its industry peers (13.6x). This implies that investors are undervaluing each dollar of 1359’s earnings. As such, our analysis shows that 1359 represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy 1359 immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to 1359, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 1359, 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 1359 to are fairly valued by the market. If this is violated, 1359’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 1359. 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:
Future Outlook: What are well-informed industry analysts predicting for 1359’s future growth? Take a look at our free research report of analyst consensus for 1359’s outlook.
Past Track Record: Has 1359 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 1359’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.
