Yintech Investment Holdings Limited (NASDAQ:YIN) is currently trading at a trailing P/E of 5x, which is lower than the industry average of 16.8x. While YIN might seem like an attractive stock to buy, 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. Check out our latest analysis for Yintech Investment Holdings
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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 YIN
Price-Earnings Ratio = Price per share ÷ Earnings per share
YIN Price-Earnings Ratio = CN¥62.15 ÷ CN¥12.335 = 5x
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 YIN, 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. YIN’s P/E of 5x is lower than its industry peers (16.8x), which implies that each dollar of YIN’s earnings is being undervalued by investors. Therefore, according to this analysis, YIN is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that YIN 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 YIN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with YIN, 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 YIN to are fairly valued by the market. If this does not hold true, YIN’s lower P/E ratio may be because firms in our peer group are overpriced 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.