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 Langham Hospitality Investments Limited (HGK:1270).
Langham Hospitality Investments Limited (HGK:1270) is trading with a trailing P/E of 6x, which is lower than the industry average of 7.3x. Although some investors may jump to the conclusion that this is a great buying opportunity, 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 Langham Hospitality Investments
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for 1270
Price per share = HK$3.3
Earnings per share = HK$0.550
∴ Price-Earnings Ratio = HK$3.3 ÷ HK$0.550 = 6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against 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 1270, 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.
1270’s P/E of 6x is lower than its industry peers (7.3x), which implies that each dollar of 1270’s earnings is being undervalued by investors. Therefore, according to this analysis, 1270 is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy 1270, 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 1270. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with 1270, then investors would naturally value 1270 at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with 1270, investors would also value 1270 at a lower price since it is a lower growth investment. Both scenarios would explain why 1270 has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 1270 to are fairly valued by the market. If this does not hold, there is a possibility that 1270’s P/E is lower because firms in our peer group are being overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 1270, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for 1270’s future growth? Take a look at our free research report of analyst consensus for 1270’s outlook.
- Past Track Record: Has 1270 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 1270’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.