Yintech Investment Holdings Limited (NASDAQ:YIN) trades with a trailing P/E of 83.6x, which is higher than the industry average of 16.6x. While YIN 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Yintech Investment Holdings
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 YIN
Price-Earnings Ratio = Price per share ÷ Earnings per share
YIN Price-Earnings Ratio = CN¥58.76 ÷ CN¥0.703 = 83.6x
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. Since YIN’s P/E of 83.6x is higher than its industry peers (16.6x), it means that investors are paying more than they should for each dollar of YIN’s earnings. Therefore, according to this analysis, YIN is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your YIN shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to YIN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with YIN, 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 YIN to are fairly valued by the market. If this is violated, YIN’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 rebalance your portfolio and reduce your holdings in YIN. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for YIN’s future growth? Take a look at our free research report of analyst consensus for YIN’s outlook.
- Financial Health: Is YIN’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.
- 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.