Yahoo Finance Should You Be Tempted To Buy Hotung Investment Holdings Limited (SGX:BLS) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Hotung Investment Holdings Limited (SGX:BLS)’s fundamentals and stock market performance.
Hotung Investment Holdings Limited (SGX:BLS) is currently trading at a trailing P/E of 10.7x, which is lower than the industry average of 21.1x. While this makes BLS appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Hotung Investment 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 BLS
Price-Earnings Ratio = Price per share ÷ Earnings per share
BLS Price-Earnings Ratio = NT$40.72 ÷ NT$3.803 = 10.7x
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 BLS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 10.7x, BLS’s P/E is lower than its industry peers (21.1x). This implies that investors are undervaluing each dollar of BLS’s earnings. As such, our analysis shows that BLS represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy BLS immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BLS. 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 BLS, 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 BLS to are fairly valued by the market. If this is violated, BLS’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 BLS, 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:
Future Outlook: What are well-informed industry analysts predicting for BLS’s future growth? Take a look at our free research report of analyst consensus for BLS’s outlook.
Past Track Record: Has BLS 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 BLS’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.
