Yahoo Finance Should You Be Tempted To Sell Broadway Industrial Group Limited (SGX:B69) At Its Current PE Ratio?
Broadway Industrial Group Limited (SGX:B69) is currently trading at a trailing P/E of 27.7x, which is higher than the industry average of 8.4x. While this makes B69 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Broadway Industrial Group
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 B69
Price-Earnings Ratio = Price per share ÷ Earnings per share
B69 Price-Earnings Ratio = SGD0.11 ÷ SGD0.004 = 27.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to B69, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 27.7x, B69’s P/E is higher than its industry peers (8.4x). This implies that investors are overvaluing each dollar of B69’s earnings. Therefore, according to this analysis, B69 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your B69 shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to B69. 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 B69, 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 B69 to are fairly valued by the market. If this is violated, B69’s P/E may be lower than its peers as they are actually overvalued by investors.
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 B69. 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 urge you to complete your research by taking a look at the following:
Financial Health: Is B69’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 B69 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 B69’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.
