Yahoo Finance Should You Buy Kunlun Energy Company Limited (HKG:135) At This PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Kunlun Energy Company Limited (HKG:135)’s fundamentals and stock market performance.
Kunlun Energy Company Limited (HKG:135) trades with a trailing P/E of 9.7x, which is lower than the industry average of 13.3x. While 135 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Kunlun Energy
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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.
P/E Calculation for 135
Price-Earnings Ratio = Price per share ÷ Earnings per share
135 Price-Earnings Ratio = CN¥5.74 ÷ CN¥0.590 = 9.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 135, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since 135’s P/E of 9.7x is lower than its industry peers (13.3x), it means that investors are paying less than they should for each dollar of 135’s earnings. As such, our analysis shows that 135 represents an under-priced stock.
A few caveats
Before you jump to the conclusion that 135 is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to 135, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with 135, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing 135 to are fairly valued by the market. If this does not hold true, 135’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 135, 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 135’s future growth? Take a look at our free research report of analyst consensus for 135’s outlook.
Past Track Record: Has 135 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 135’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
