Is It Time To Sell Hi-P International Limited (SGX:H17) Based Off Its PE Ratio?
Hi-P International Limited (SGX:H17) trades with a trailing P/E of 17.6x, which is higher than the industry average of 10.7x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, 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 Hi-P International
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 H17
Price-Earnings Ratio = Price per share ÷ Earnings per share
H17 Price-Earnings Ratio = SGD1.97 ÷ SGD0.112 = 17.6x
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 H17, 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. Since H17’s P/E of 17.6x is higher than its industry peers (10.7x), it means that investors are paying more than they should for each dollar of H17’s earnings. Therefore, according to this analysis, H17 is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that H17 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to H17, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with H17, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing H17 to are fairly valued by the market. If this does not hold, there is a possibility that H17’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.
