Yahoo Finance Does Delfi Limited’s (SGX:P34) PE Ratio Warrant A Sell?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Delfi Limited (SGX:P34)’s fundamentals and stock market performance.
Delfi Limited (SGX:P34) is currently trading at a trailing P/E of 23.2x, which is higher than the industry average of 14.8x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. 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 Delfi
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 P34
Price-Earnings Ratio = Price per share ÷ Earnings per share
P34 Price-Earnings Ratio = $0.91 ÷ $0.0393 = 23.2x
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 P34, 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. P34’s P/E of 23.2x is higher than its industry peers (14.8x), which implies that each dollar of P34’s earnings is being overvalued by investors. As such, our analysis shows that P34 represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your P34 shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to P34. 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 P34, 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 P34 to are fairly valued by the market. If this does not hold, there is a possibility that P34’s P/E is lower because our peer group is 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 P34. 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 P34’s future growth? Take a look at our free research report of analyst consensus for P34’s outlook.
Past Track Record: Has P34 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 P34’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.
