Yahoo Finance What Does Industrial and Commercial Bank of China Limited’s (HKG:1398) P/E Ratio Tell You?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Industrial and Commercial Bank of China Limited (HKG:1398) trades on a trailing P/E of 5.8. This isn’t too far from the industry average (which is 5.6). Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for Industrial and Commercial Bank of China
Breaking down the Price-Earnings 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 1398
Price-Earnings Ratio = Price per share ÷ Earnings per share
1398 Price-Earnings Ratio = CN¥4.68 ÷ CN¥0.811 = 5.8x
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 1398, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Industrial and Commercial Bank of China Limited (HKG:1398) is currently trading at a trailing P/E of 5.8, which is close to the industry average of 5.6. This multiple is a median of profitable companies of 24 Banks companies in HK including Shengjing Bank, Bank of Chongqing and Harbin Bank. You can think of it like this: the market is suggesting that 1398 has similar prospects to its peers in the same industry.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to 1398. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Industrial and Commercial Bank of China Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 1398 are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be 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 1398. 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 1398’s future growth? Take a look at our free research report of analyst consensus for 1398’s outlook.
Past Track Record: Has 1398 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 1398’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.
