Yahoo Finance Is It Time To Sell Cityneon Holdings Limited (SGX:5HJ) Based Off Its PE Ratio?
Cityneon Holdings Limited (SGX:5HJ) is trading with a trailing P/E of 12.5x, which is higher than the industry average of 11.8x. While 5HJ might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Cityneon Holdings
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 5HJ
Price-Earnings Ratio = Price per share ÷ Earnings per share
5HJ Price-Earnings Ratio = SGD0.98 ÷ SGD0.078 = 12.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as 5HJ, 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. 5HJ’s P/E of 12.5x is higher than its industry peers (11.8x), which implies that each dollar of 5HJ’s earnings is being overvalued by investors. Therefore, according to this analysis, 5HJ is an over-priced stock.
A few caveats
Before you jump to the conclusion that 5HJ should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to 5HJ. 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 5HJ, 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 5HJ to are fairly valued by the market. If this does not hold, there is a possibility that 5HJ’s P/E is lower because our peer group is overvalued by the market.
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 5HJ. 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:
Future Outlook: What are well-informed industry analysts predicting for 5HJ’s future growth? Take a look at our free research report of analyst consensus for 5HJ’s outlook.
Past Track Record: Has 5HJ 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 5HJ’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.
