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 learn about the link between company’s fundamentals and stock market performance.
Bonvests Holdings Limited (SGX:B28) is trading with a trailing P/E of 76.7, which is higher than the industry average of 29.1. 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 explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Bonvests Holdings
What you need to know about the P/E 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 B28
Price-Earnings Ratio = Price per share ÷ Earnings per share
B28 Price-Earnings Ratio = SGD1.33 ÷ SGD0.0173 = 76.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to B28, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. B28’s P/E of 76.7 is higher than its industry peers (29.1), which implies that each dollar of B28’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 4 Industrials companies in SG including Jardine Strategic Holdings, Jardine Matheson Holdings and Sembcorp Industries. You could also say that the market is suggesting that B28 is a stronger business than the average comparable company.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to B28. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Bonvests 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 B28 may not be 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.