This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Hallenstein Glasson Holdings Limited (NZSE:HLG).
Hallenstein Glasson Holdings Limited (NZSE:HLG) is currently trading at a trailing P/E of 12.1x, which is lower than the industry average of 12.3x. While HLG 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Hallenstein Glasson Holdings
Breaking down the Price-Earnings 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 HLG
Price-Earnings Ratio = Price per share ÷ Earnings per share
HLG Price-Earnings Ratio = NZ$4.7 ÷ NZ$0.389 = 12.1x
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 HLG, 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. At 12.1x, HLG’s P/E is lower than its industry peers (12.3x). This implies that investors are undervaluing each dollar of HLG’s earnings. Therefore, according to this analysis, HLG is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy HLG, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to HLG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with HLG, 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 HLG to are fairly valued by the market. If this is violated, HLG’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to HLG. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for HLG’s future growth? Take a look at our free research report of analyst consensus for HLG’s outlook.
- Past Track Record: Has HLG 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 HLG’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.