Yahoo Finance Does HSBC Holdings plc’s (LON:HSBA) PE Ratio Warrant A Sell?
HSBC Holdings plc (LSE:HSBA) is currently trading at a trailing P/E of 20.6x, which is higher than the industry average of 15x. While this makes HSBA appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for HSBC Holdings
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 pound of the company’s earnings.
P/E Calculation for HSBA
Price-Earnings Ratio = Price per share ÷ Earnings per share
HSBA Price-Earnings Ratio = $9.83 ÷ $0.477 = 20.6x
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 HSBA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 20.6x, HSBA’s P/E is higher than its industry peers (15x). This implies that investors are overvaluing each dollar of HSBA’s earnings. Therefore, according to this analysis, HSBA is an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your HSBA shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to HSBA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with HSBA, 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 HSBA to are fairly valued by the market. If this does not hold, there is a possibility that HSBA’s P/E is lower because our peer group is overvalued 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 HSBA. 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 HSBA’s future growth? Take a look at our free research report of analyst consensus for HSBA’s outlook.
Past Track Record: Has HSBA 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 HSBA’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.
