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Noel Gifts International Ltd (SGX:543) trades with a trailing P/E of 12.4x, which is higher than the industry average of 9.9x. While 543 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Noel Gifts International
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 543
Price-Earnings Ratio = Price per share ÷ Earnings per share
543 Price-Earnings Ratio = SGD0.23 ÷ SGD0.019 = 12.4x
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 543, 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. 543’s P/E of 12.4x is higher than its industry peers (9.9x), which implies that each dollar of 543’s earnings is being overvalued by investors. Therefore, according to this analysis, 543 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your 543 shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 543. 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 543, 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 543 to are fairly valued by the market. If this is violated, 543’s P/E may be lower than its peers as they are actually overvalued by investors.
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.