Should You Be Tempted To Sell Freeman FinTech Corporation Limited (HKG:279) At Its Current PE Ratio?
Freeman FinTech Corporation Limited (SEHK:279) trades with a trailing P/E of 24.8x, which is higher than the industry average of 16.1x. While 279 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Freeman FinTech
What you need to know about the P/E ratio
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 279
Price-Earnings Ratio = Price per share ÷ Earnings per share
279 Price-Earnings Ratio = HK$0.68 ÷ HK$0.027 = 24.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 279, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since 279’s P/E of 24.8x is higher than its industry peers (16.1x), it means that investors are paying more than they should for each dollar of 279’s earnings. Therefore, according to this analysis, 279 is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your 279 shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 279. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with 279, 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 279 to are fairly valued by the market. If this does not hold, there is a possibility that 279’s P/E is lower because our peer group is overvalued by the market.
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.
