Yahoo Finance Does NagaCorp Ltd’s (HKG:3918) PE Ratio Signal A Buying Opportunity?
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.
NagaCorp Ltd (HKG:3918) is currently trading at a trailing P/E of 14.5x, which is lower than the industry average of 17.1x. While 3918 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for NagaCorp
What you need to know about 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 3918
Price-Earnings Ratio = Price per share ÷ Earnings per share
3918 Price-Earnings Ratio = $0.99 ÷ $0.0685 = 14.5x
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 3918, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. 3918’s P/E of 14.5 is lower than its industry peers (17.1), which implies that each dollar of 3918’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 25 Hospitality companies in HK including Shun Ho Holdings, Shun Ho Property Investments and Macau Legend Development. You can think of it like this: the market is suggesting that 3918 is a weaker business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to 3918. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with 3918, 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 3918 to are fairly valued by the market. If this does not hold true, 3918’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 undervaluation could signal a good buying opportunity to increase your exposure to 3918. 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 3918’s future growth? Take a look at our free research report of analyst consensus for 3918’s outlook.
Past Track Record: Has 3918 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 3918’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.
