Yahoo Finance What Does 58com Inc’s (NYSE:WUBA) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
58com Inc (NYSE:WUBA) is currently trading at a trailing P/E of 41.2, which is higher than the industry average of 28.5. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for 58.com
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 WUBA
Price-Earnings Ratio = Price per share ÷ Earnings per share
WUBA Price-Earnings Ratio = CN¥456.99 ÷ CN¥11.092 = 41.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to WUBA, 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 41.2, WUBA’s P/E is higher than its industry peers (28.5). This implies that investors are overvaluing each dollar of WUBA’s earnings. This multiple is a median of profitable companies of 22 Interactive Media and Services companies in US including DHI Group, Cars.com and Momo. You could think of it like this: the market is pricing WUBA as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to WUBA. If this isn’t the case, the difference in P/E could be due to other factors. For example, 58com Inc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to WUBA may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to WUBA. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WUBA’s future growth? Take a look at our free research report of analyst consensus for WUBA’s outlook.
Past Track Record: Has WUBA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of WUBA’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
