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 Phoenix New Media Limited (NYSE:FENG).
Phoenix New Media Limited (NYSE:FENG) trades with a trailing P/E of 174.5x, which is higher than the industry average of 32.2x. While FENG 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 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 Phoenix New Media
Breaking down the Price-Earnings 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 FENG
Price per share = CN¥29.33
Earnings per share = CN¥0.168
∴ Price-Earnings Ratio = CN¥29.33 ÷ CN¥0.168 = 174.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FENG, such as capital structure and profitability. 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 174.5x, FENG’s P/E is higher than its industry peers (32.2x). This implies that investors are overvaluing each dollar of FENG’s earnings. Therefore, according to this analysis, FENG is an over-priced stock.
A few caveats
However, before you rush out to sell your FENG 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 FENG. 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 FENG, then FENG’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 FENG. In this case, FENG’s P/E would be higher since investors would also reward FENG’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing FENG to are fairly valued by the market. If this assumption is violated, FENG’s P/E may be higher than its peers because its peers are actually undervalued by investors.
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 FENG. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FENG’s future growth? Take a look at our free research report of analyst consensus for FENG’s outlook.
- Past Track Record: Has FENG 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 FENG’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.