Yahoo Finance Should You Be Tempted To Buy Overseas Education Limited (SGX:RQ1) At Its Current PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Overseas Education Limited (SGX:RQ1).
Overseas Education Limited (SGX:RQ1) is currently trading at a trailing P/E of 22.7x, which is lower than the industry average of 29.3x. 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. Today, 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 Overseas Education
Breaking down the P/E 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 RQ1
Price-Earnings Ratio = Price per share ÷ Earnings per share
RQ1 Price-Earnings Ratio = SGD0.35 ÷ SGD0.0154 = 22.7x
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 RQ1, 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. Since RQ1’s P/E of 22.7x is lower than its industry peers (28.5x), it means that investors are paying less than they should for each dollar of RQ1’s earnings. Therefore, according to this analysis, RQ1 is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy RQ1 immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RQ1. 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 RQ1, 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 RQ1 to are fairly valued by the market. If this does not hold true, RQ1’s lower P/E ratio may be because firms in our peer group are 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 RQ1 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 RQ1’s future growth? Take a look at our free research report of analyst consensus for RQ1’s outlook.
Past Track Record: Has RQ1 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 RQ1’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.
