Yahoo Finance Does AGTech Holdings Limited’s (HKG:8279) PE Ratio Warrant A Sell?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
AGTech Holdings Limited (HKG:8279) trades with a trailing P/E of 28.5x, which is higher than the industry average of 13.5x. While 8279 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. Today, 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 AGTech Holdings
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 8279
Price-Earnings Ratio = Price per share ÷ Earnings per share
8279 Price-Earnings Ratio = HK$0.59 ÷ HK$0.0207 = 28.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 8279, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since 8279’s P/E of 28.5x is higher than its industry peers (13.5x), it means that investors are paying more than they should for each dollar of 8279’s earnings. This multiple is a median of profitable companies of 21 IT companies in HK including Green Leader Holdings Group, CCID Consulting and EFT Solutions Holdings. As such, our analysis shows that 8279 represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your 8279 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 8279. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with 8279, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing 8279 to are fairly valued by the market. If this does not hold, there is a possibility that 8279’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 8279, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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:
Financial Health: Are 8279’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has 8279 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 8279’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.
