Should You Be Tempted To Sell Riverine China Holdings Limited (HKG:1417) Because Of Its PE Ratio?
Riverine China Holdings Limited (SEHK:1417) is trading with a trailing P/E of 19.7x, which is higher than the industry average of 13.9x. While 1417 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. 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 Riverine China Holdings
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 1417
Price-Earnings Ratio = Price per share ÷ Earnings per share
1417 Price-Earnings Ratio = CN¥2.31 ÷ CN¥0.117 = 19.7x
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 1417, 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. Since 1417’s P/E of 19.7x is higher than its industry peers (13.9x), it means that investors are paying more than they should for each dollar of 1417’s earnings. As such, our analysis shows that 1417 represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your 1417 shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to 1417, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 1417, 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 1417 to are fairly valued by the market. If this does not hold, there is a possibility that 1417’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 1417, the overvaluation of the stock may mean it is a good time to reduce 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 highly recommend you to complete your research by taking a look at the following:
Financial Health: Is 1417’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Valuation: What is 1417 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1417 is currently mispriced by the market.
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.
