This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Hexindai Inc (NASDAQ:HX)’s fundamentals and stock market performance.
Hexindai Inc (NASDAQ:HX) is currently trading at a trailing P/E of 6.7x, which is lower than the industry average of 14.6x. 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. 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 Hexindai
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 HX
Price per share = $9.71
Earnings per share = $1.456
∴ Price-Earnings Ratio = $9.71 ÷ $1.456 = 6.7x
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 HX, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
HX’s P/E of 6.7x is lower than its industry peers (14.6x), which implies that each dollar of HX’s earnings is being undervalued by investors. Therefore, according to this analysis, HX is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy HX, 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 HX. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared higher growth firms with HX, then HX’s P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. Alternatively, if you inadvertently compared less risky firms with HX, HX’s P/E would again be lower since investors would reward its peers’ lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing HX to are fairly valued by the market. If this assumption does not hold true, HX’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to HX. 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:
- Future Outlook: What are well-informed industry analysts predicting for HX’s future growth? Take a look at our free research report of analyst consensus for HX’s outlook.
- Financial Health: Is HX’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.
- 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.