Yahoo Finance Is It Time To Sell Golden Agri-Resources Ltd (SGX:E5H) Based Off Its PE Ratio?
Golden Agri-Resources Ltd (SGX:E5H) is trading with a trailing P/E of 62.1x, which is higher than the industry average of 15.4x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, 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. Check out our latest analysis for Golden Agri-Resources
Breaking down the Price-Earnings 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 E5H
Price-Earnings Ratio = Price per share ÷ Earnings per share
E5H Price-Earnings Ratio = $0.24 ÷ $0.004 = 62.1x
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 E5H, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since E5H’s P/E of 62.1x is higher than its industry peers (15.4x), it means that investors are paying more than they should for each dollar of E5H’s earnings. Therefore, according to this analysis, E5H is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that E5H should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to E5H, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with E5H, 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 E5H to are fairly valued by the market. If this does not hold, there is a possibility that E5H’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 E5H. 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 E5H’s future growth? Take a look at our free research report of analyst consensus for E5H’s outlook.
Past Track Record: Has E5H 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 E5H’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.
