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.
Haier Electronics Group Co Ltd (HKG:1169) is trading with a trailing P/E of 13.5, which is close to the industry average of 13.4. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
Check out our latest analysis for Haier Electronics Group
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. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for 1169
Price-Earnings Ratio = Price per share ÷ Earnings per share
1169 Price-Earnings Ratio = CN¥17.86 ÷ CN¥1.319 = 13.5x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 1169, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Haier Electronics Group Co Ltd (HKG:1169) is currently trading at a trailing P/E of 13.5, which is close to the industry average of 13.4. This multiple is a median of profitable companies of 24 Consumer Durables companies in HK including Samson Holding, China Baofeng (International) and Kin Yat Holdings. One could put it like this: the market is pricing 1169 as if it is roughly average for its industry.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to 1169. If this isn’t the case, the difference in P/E could be due to other factors. For example, Haier Electronics Group Co Ltd could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with 1169 are not 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.