Yahoo Finance Does Brook Crompton Holdings Ltd’s (SGX:AWC) PE Ratio Warrant A Buy?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Brook Crompton Holdings Ltd (SGX:AWC).
Brook Crompton Holdings Ltd (SGX:AWC) is currently trading at a trailing P/E of 9x, which is lower than the industry average of 19.6x. While AWC 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Brook Crompton Holdings
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 AWC
Price-Earnings Ratio = Price per share ÷ Earnings per share
AWC Price-Earnings Ratio = SGD0.80 ÷ SGD0.0890 = 9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AWC, 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. At 9x, AWC’s P/E is lower than its industry peers (19.6x). This implies that investors are undervaluing each dollar of AWC’s earnings. As such, our analysis shows that AWC represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy AWC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to AWC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with AWC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing AWC to are fairly valued by the market. If this does not hold, there is a possibility that AWC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of AWC to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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:
Future Outlook: What are well-informed industry analysts predicting for AWC’s future growth? Take a look at our free research report of analyst consensus for AWC’s outlook.
Past Track Record: Has AWC 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 AWC’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.
