Yahoo Finance Is China Mengniu Dairy Company Limited (HKG:2319) Attractive At This PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
China Mengniu Dairy Company Limited (HKG:2319) is currently trading at a trailing P/E of 34.5, which is higher than the industry average of 14.1. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 China Mengniu Dairy
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 2319
Price-Earnings Ratio = Price per share ÷ Earnings per share
2319 Price-Earnings Ratio = CN¥21.96 ÷ CN¥0.637 = 34.5x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 2319, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since 2319’s P/E of 34.5 is higher than its industry peers (14.1), it means that investors are paying more for each dollar of 2319’s earnings. This multiple is a median of profitable companies of 25 Food companies in HK including Chia Tai Enterprises International, China Haisheng Juice Holdings and China Shenghai Food Holdings. You could think of it like this: the market is pricing 2319 as if it is a stronger company than the average of its industry group.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to 2319. If this isn’t the case, the difference in P/E could be due to other factors. For example, China Mengniu Dairy Company Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 2319 are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to 2319. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 2319’s future growth? Take a look at our free research report of analyst consensus for 2319’s outlook.
Past Track Record: Has 2319 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 2319’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
