The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Genscript Biotech Corporation (HKG:1548).
Genscript Biotech Corporation (HKG:1548) trades with a trailing P/E of 195.7x, which is higher than the industry average of 32.8x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Genscript Biotech
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for 1548
Price per share = $2.98
Earnings per share = $0.0152
∴ Price-Earnings Ratio = $2.98 ÷ $0.0152 = 195.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 1548, such as company lifetime and products sold. 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.
At 195.7x, 1548’s P/E is higher than its industry peers (32.8x). This implies that investors are overvaluing each dollar of 1548’s earnings. Therefore, according to this analysis, 1548 is an over-priced stock.
A few caveats
However, before you rush out to sell your 1548 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 1548. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared lower growth firms with 1548, then 1548’s P/E would naturally be higher since investors would reward 1548’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with 1548, 1548’s P/E would again be higher since investors would reward 1548’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing 1548 to are fairly valued by the market. If this assumption is violated, 1548’s P/E may be higher than its peers because its peers are actually undervalued by investors.
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 1548. 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 1548’s future growth? Take a look at our free research report of analyst consensus for 1548’s outlook.
- Past Track Record: Has 1548 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 1548’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.