Yahoo Finance Is China Petroleum & Chemical Corporation’s (HKG:386) PE Ratio A Signal To Sell For Investors?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in China Petroleum & Chemical Corporation (HKG:386).
China Petroleum & Chemical Corporation (HKG:386) trades with a trailing P/E of 13.4x, which is higher than the industry average of 10.4x. While this makes 386 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 China Petroleum & Chemical
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 386
Price-Earnings Ratio = Price per share ÷ Earnings per share
386 Price-Earnings Ratio = CN¥5.91 ÷ CN¥0.440 = 13.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 386, 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. 386’s P/E of 13.4x is higher than its industry peers (10.4x), which implies that each dollar of 386’s earnings is being overvalued by investors. Therefore, according to this analysis, 386 is an over-priced stock.
A few caveats
Before you jump to the conclusion that 386 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 386, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 386, 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 386 to are fairly valued by the market. If this does not hold, there is a possibility that 386’s P/E is lower because our peer group is overvalued by the market.
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 386. 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 386’s future growth? Take a look at our free research report of analyst consensus for 386’s outlook.
Past Track Record: Has 386 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 386’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.
