Should You Be Tempted To Sell Zijin Mining Group Company Limited (HKG:2899) Because Of Its PE Ratio?

Zijin Mining Group Company Limited (SEHK:2899) is currently trading at a trailing P/E of 17x, which is higher than the industry average of 12.6x. 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. In this article, 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 Zijin Mining Group

Demystifying the P/E ratio

P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for 2899

Price per share = CN¥2.67

Earnings per share = CN¥0.157

∴ Price-Earnings Ratio = CN¥2.67 ÷ CN¥0.157 = 17x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 2899, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. 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.

Since 2899’s P/E of 17x is higher than its industry peers (12.6x), it means that investors are paying more than they should for each dollar of 2899’s earnings. Therefore, according to this analysis, 2899 is an over-priced stock.

Assumptions to watch out for

While our conclusion might prompt you to sell your 2899 shares immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to 2899. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with 2899, then investors would naturally value 2899 at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with 2899, investors would also value 2899 at a higher price since it is a higher growth investment. Both scenarios would explain why 2899 has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 2899 to are fairly valued by the market. If this does not hold, there is a possibility that 2899’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 2899. 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:

1. Future Outlook: What are well-informed industry analysts predicting for 2899’s future growth? Take a look at our free research report of analyst consensus for 2899’s outlook.
2. Past Track Record: Has 2899 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 2899’s historicals for more clarity.
3. 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.