Jardine Cycle & Carriage Limited (SGX:C07) is currently trading at a trailing P/E of 15.5x, which is higher than the industry average of 15x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Jardine Cycle & Carriage
Breaking down 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 C07
Price-Earnings Ratio = Price per share ÷ Earnings per share
C07 Price-Earnings Ratio = $31.22 ÷ $2.019 = 15.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to C07, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 15.5x, C07’s P/E is higher than its industry peers (15x). This implies that investors are overvaluing each dollar of C07’s earnings. Therefore, according to this analysis, C07 is an over-priced stock.
A few caveats
Before you jump to the conclusion that C07 should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to C07. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with C07, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing C07 to are fairly valued by the market. If this does not hold true, C07’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
To help readers see pass 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.