# Is China Advanced Construction Materials Group Inc (NASDAQ:CADC) Attractive At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in China Advanced Construction Materials Group Inc (NASDAQ:CADC).

China Advanced Construction Materials Group Inc (NASDAQ:CADC) trades with a trailing P/E of 22.8x, which is higher than the industry average of 17.2x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

### What you need to know about the P/E ratio

P/E is a popular ratio used for 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.

Formula

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

Price per share = \$6

Earnings per share = \$0.263

∴ Price-Earnings Ratio = \$6 ÷ \$0.263 = 22.8x

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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CADC, 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.

Since CADC’s P/E of 22.8x is higher than its industry peers (17.2x), it means that investors are paying more than they should for each dollar of CADC’s earnings. This multiple is a median of profitable companies of 25 Basic Materials companies in US including China Infrastructure Construction, World Wide Stone and China Runji Cement. Therefore, according to this analysis, CADC is an over-priced stock.