In This Article:
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 begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
PNE Industries Ltd (SGX:BDA) is currently trading at a trailing P/E of 13.1, which is higher than the industry average of 10.6. 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.
See our latest analysis for PNE Industries
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 BDA
Price-Earnings Ratio = Price per share ÷ Earnings per share
BDA Price-Earnings Ratio = SGD0.85 ÷ SGD0.0652 = 13.1x
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 BDA, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. BDA’s P/E of 13.1 is higher than its industry peers (10.6), which implies that each dollar of BDA’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 21 Electronic companies in SG including Willas-Array Electronics (Holdings), Serial System and Ban Leong Technologies. You could think of it like this: the market is pricing BDA as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
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 BDA. If this isn’t the case, the difference in P/E could be due to other factors. For example, PNE Industries 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 BDA are not 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.