I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in VS International Group Limited (HKG:1002).
VS International Group Limited (HKG:1002) is currently trading at a trailing P/E of 100.8x, which is higher than the industry average of 15.1x. While this makes 1002 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for V.S. International Group
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for 1002
Price per share = CN¥0.15
Earnings per share = CN¥0.00148
∴ Price-Earnings Ratio = CN¥0.15 ÷ CN¥0.00148 = 100.8x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 1002, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
1002’s P/E of 100.8x is higher than its industry peers (15.1x), which implies that each dollar of 1002’s earnings is being overvalued by investors. Therefore, according to this analysis, 1002 is an over-priced stock.
A few caveats
However, before you rush out to sell your 1002 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to 1002. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing riskier firms with 1002, then 1002’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with 1002. In this case, 1002’s P/E would be higher since investors would also reward 1002’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing 1002 to are fairly valued by the market. If this does not hold, there is a possibility that 1002’s P/E is higher because firms in our peer group are being undervalued 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 1002. 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is 1002’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 1002 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 1002’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.