Yahoo Finance Should You Buy Cortina Holdings Limited (SGX:C41) At This PE Ratio?
Cortina Holdings Limited (SGX:C41) is currently trading at a trailing P/E of 7.6x, which is lower than the industry average of 9.3x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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. Check out our latest analysis for Cortina Holdings
Breaking down 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. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for C41
Price-Earnings Ratio = Price per share ÷ Earnings per share
C41 Price-Earnings Ratio = SGD0.84 ÷ SGD0.111 = 7.6x
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 C41, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. C41’s P/E of 7.6x is lower than its industry peers (9.3x), which implies that each dollar of C41’s earnings is being undervalued by investors. As such, our analysis shows that C41 represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy C41, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to C41. 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 C41, 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 C41 to are fairly valued by the market. If this does not hold, there is a possibility that C41’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 C41, the undervaluation of the stock may mean it is a good time to top up on 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: Is C41’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 C41 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 C41’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.
