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 Fu Yu Corporation Limited (SGX:F13)’s fundamentals and stock market performance.
Fu Yu Corporation Limited (SGX:F13) is currently trading at a trailing P/E of 29x, which is higher than the industry average of 12x. While this makes F13 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Fu Yu
Breaking down the Price-Earnings 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 F13
Price-Earnings Ratio = Price per share ÷ Earnings per share
F13 Price-Earnings Ratio = SGD0.17 ÷ SGD0.00597 = 29x
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 F13, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 29x, F13’s P/E is higher than its industry peers (12x). This implies that investors are overvaluing each dollar of F13’s earnings. Therefore, according to this analysis, F13 is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your F13 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 F13, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with F13, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing F13 to are fairly valued by the market. If this does not hold, there is a possibility that F13’s P/E is lower because our peer group is 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 rebalance your portfolio and reduce your holdings in F13. 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 F13’s future growth? Take a look at our free research report of analyst consensus for F13’s outlook.
- Past Track Record: Has F13 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 F13’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.