Yahoo Finance Does Galaxy Entertainment Group Limited’s (HKG:27) PE Ratio Signal A Selling Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Galaxy Entertainment Group Limited (HKG:27).
Galaxy Entertainment Group Limited (HKG:27) trades with a trailing P/E of 25.9x, which is higher than the industry average of 18.4x. While this makes 27 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Galaxy Entertainment Group
Breaking down the Price-Earnings 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 27
Price-Earnings Ratio = Price per share ÷ Earnings per share
27 Price-Earnings Ratio = HK$63.55 ÷ HK$2.451 = 25.9x
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 27, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 25.9x, 27’s P/E is higher than its industry peers (18.4x). This implies that investors are overvaluing each dollar of 27’s earnings. As such, our analysis shows that 27 represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your 27 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to 27, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with 27, 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 27 to are fairly valued by the market. If this does not hold true, 27’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 27. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for 27’s future growth? Take a look at our free research report of analyst consensus for 27’s outlook.
Past Track Record: Has 27 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 27’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 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.
