Yahoo Finance Is United Strength Power Holdings Limited (HKG:2337) Attractive At This PE Ratio?
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.
United Strength Power Holdings Limited (HKG:2337) trades with a trailing P/E of 37.5, which is higher than the industry average of 9.8. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for United Strength Power Holdings
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 2337
Price-Earnings Ratio = Price per share ÷ Earnings per share
2337 Price-Earnings Ratio = CN¥3.34 ÷ CN¥0.0890 = 37.5x
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 2337, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since 2337’s P/E of 37.5 is higher than its industry peers (9.8), it means that investors are paying more for each dollar of 2337’s earnings. This multiple is a median of profitable companies of 25 Specialty Retail companies in HK including Sunfonda Group Holdings, Beijing Digital Telecom and China Harmony New Energy Auto Holding. You could also say that the market is suggesting that 2337 is a stronger business than the average comparable company.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to 2337. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where United Strength Power Holdings Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to 2337 may not be 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.
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 2337. 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 2337’s future growth? Take a look at our free research report of analyst consensus for 2337’s outlook.
Financial Health: Are 2337’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.
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.
