Yahoo Finance Does Hotel Grand Central Limited’s (SGX:H18) PE Ratio Warrant A Sell?
Hotel Grand Central Limited (SGX:H18) is currently trading at a trailing P/E of 26.1x, which is higher than the industry average of 15.2x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Hotel Grand Central
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 H18
Price-Earnings Ratio = Price per share ÷ Earnings per share
H18 Price-Earnings Ratio = SGD1.42 ÷ SGD0.054 = 26.1x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 H18, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 26.1x, H18’s P/E is higher than its industry peers (15.2x). This implies that investors are overvaluing each dollar of H18’s earnings. Therefore, according to this analysis, H18 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your H18 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to H18, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with H18, 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 H18 to are fairly valued by the market. If this is violated, H18’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on H18, the overvaluation of the stock may mean it is a good time to reduce 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 urge you to complete your research by taking a look at the following:
Financial Health: Is H18’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 H18 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 H18’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.
