Yahoo Finance Is NetDragon Websoft Holdings Limited (HKG:777) Attractive At This PE Ratio?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
NetDragon Websoft Holdings Limited (HKG:777) is trading with a trailing P/E of 49.5, which is higher than the industry average of 16.6. Though this might seem to be a negative, 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.
View our latest analysis for NetDragon Websoft Holdings
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 777
Price-Earnings Ratio = Price per share ÷ Earnings per share
777 Price-Earnings Ratio = CN¥14.53 ÷ CN¥0.293 = 49.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 777, 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 777’s P/E of 49.5 is higher than its industry peers (16.6), it means that investors are paying more for each dollar of 777’s earnings. This multiple is a median of profitable companies of 24 Software companies in HK including Boyaa Interactive International, Beijing Beida Jade Bird Universal Sci-Tech and Founder Holdings. You could also say that the market is suggesting that 777 is a stronger business than the average comparable company.
A few caveats
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to 777. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where NetDragon Websoft Holdings 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. We should also be aware that the stocks we are comparing to 777 may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is 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 777. 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 777’s future growth? Take a look at our free research report of analyst consensus for 777’s outlook.
Past Track Record: Has 777 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 777’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.
