Yahoo Finance Does Tianyun International Holdings Limited’s (HKG:6836) PE Ratio Signal A Buying Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Tianyun International Holdings Limited (HKG:6836) is currently trading at a trailing P/E of 7.3x, which is lower than the industry average of 13.7x. While this makes 6836 appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Tianyun International Holdings
Breaking down the Price-Earnings 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 6836
Price-Earnings Ratio = Price per share ÷ Earnings per share
6836 Price-Earnings Ratio = CN¥1.03 ÷ CN¥0.142 = 7.3x
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 6836, 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. Since 6836’s P/E of 7.3 is lower than its industry peers (13.7), it means that investors are paying less for each dollar of 6836’s earnings. This multiple is a median of profitable companies of 24 Food companies in HK including Chia Tai Enterprises International, China Starch Holdings and China Haisheng Juice Holdings. You can think of it like this: the market is suggesting that 6836 is a weaker business than the average comparable company.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 6836. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with 6836, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing 6836 to are fairly valued by the market. If this is violated, 6836’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on 6836, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for 6836’s future growth? Take a look at our free research report of analyst consensus for 6836’s outlook.
Past Track Record: Has 6836 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 6836’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.
