Hengan International Group Company Limited (SEHK:1044) is currently trading at a trailing P/E of 17.9x, which is lower than the industry average of 23.8x. While 1044 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Hengan International Group
Demystifying 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 1044
Price-Earnings Ratio = Price per share ÷ Earnings per share
1044 Price-Earnings Ratio = CN¥56.48 ÷ CN¥3.149 = 17.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 1044, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since 1044’s P/E of 17.9x is lower than its industry peers (23.8x), it means that investors are paying less than they should for each dollar of 1044’s earnings. Therefore, according to this analysis, 1044 is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy 1044 immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to 1044. 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 1044, 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 1044 to are fairly valued by the market. If this is violated, 1044’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 1044. 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 1044’s future growth? Take a look at our free research report of analyst consensus for 1044’s outlook.
- Past Track Record: Has 1044 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 1044’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.