This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Global Cord Blood Corporation (NYSE:CO).
Global Cord Blood Corporation (NYSE:CO) trades with a trailing P/E of 27.8x, which is higher than the industry average of 21.9x. While CO might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Global Cord Blood
Breaking down 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for CO
Price per share = CN¥65.43
Earnings per share = CN¥2.354
∴ Price-Earnings Ratio = CN¥65.43 ÷ CN¥2.354 = 27.8x
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. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CO, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll 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.
At 27.8x, CO’s P/E is higher than its industry peers (21.9x). This implies that investors are overvaluing each dollar of CO’s earnings. Therefore, according to this analysis, CO is an over-priced stock.
A few caveats
However, before you rush out to sell your CO 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 CO. 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 CO, then CO’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 CO. In this case, CO’s P/E would be higher since investors would also reward CO’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CO to are fairly valued by the market. If this does not hold, there is a possibility that CO’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in CO. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 CO’s future growth? Take a look at our free research report of analyst consensus for CO’s outlook.
- Past Track Record: Has CO 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 CO’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.