Is It Time To Buy Wuling Motors Holdings Limited (HKG:305) Based Off Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Wuling Motors Holdings Limited (HKG:305).
Wuling Motors Holdings Limited (HKG:305) trades with a trailing P/E of 4.1x, which is lower than the industry average of 10.6x. While this makes 305 appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Wuling Motors Holdings
Demystifying 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 305
Price-Earnings Ratio = Price per share ÷ Earnings per share
305 Price-Earnings Ratio = CN¥0.39 ÷ CN¥0.0942 = 4.1x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 305, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 4.1x, 305’s P/E is lower than its industry peers (10.6x). This implies that investors are undervaluing each dollar of 305’s earnings. Therefore, according to this analysis, 305 is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy 305, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to 305, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with 305, 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 305 to are fairly valued by the market. If this is violated, 305’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 305 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for 305’s future growth? Take a look at our free research report of analyst consensus for 305’s outlook.
Past Track Record: Has 305 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 305’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.
