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Should You Be Tempted To Buy YY Inc (NASDAQ:YY) At Its Current PE Ratio?

YY Inc (NASDAQ:YY) trades with a trailing P/E of 14x, which is lower than the industry average of 28.3x. 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for YY

Breaking down the Price-Earnings ratio

NasdaqGS:YY PE PEG Gauge Apr 27th 18
NasdaqGS:YY PE PEG Gauge Apr 27th 18

P/E is a popular ratio used for relative valuation. 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 YY

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

YY Price-Earnings Ratio = CN¥586.44 ÷ CN¥42.028 = 14x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to YY, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. YY’s P/E of 14x is lower than its industry peers (28.3x), which implies that each dollar of YY’s earnings is being undervalued by investors. As such, our analysis shows that YY represents an under-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that YY is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to YY, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with YY, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing YY to are fairly valued by the market. If this is violated, YY’s P/E may be lower than its peers as they are actually overvalued by investors.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of YY to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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:

  1. Future Outlook: What are well-informed industry analysts predicting for YY’s future growth? Take a look at our free research report of analyst consensus for YY’s outlook.

  2. Past Track Record: Has YY 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 YY’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 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.

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