Yahoo Finance Does Jardine Matheson Holdings Limited’s (SGX:J36) PE Ratio Signal A Buying Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Jardine Matheson Holdings Limited (SGX:J36) is trading with a trailing P/E of 9.5x, which is lower than the industry average of 30x. While this makes J36 appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Jardine Matheson Holdings
Breaking down 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. 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.
P/E Calculation for J36
Price-Earnings Ratio = Price per share ÷ Earnings per share
J36 Price-Earnings Ratio = $64.42 ÷ $6.753 = 9.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as J36, 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. J36’s P/E of 9.5 is lower than its industry peers (30), which implies that each dollar of J36’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 4 Industrials companies in SG including Jardine Strategic Holdings, Sembcorp Industries and Keppel. You can think of it like this: the market is suggesting that J36 is a weaker business than the average comparable company.
A few caveats
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to J36. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with J36, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing J36 to are fairly valued by the market. If this is violated, J36’s P/E may be lower than its peers as they are actually overvalued 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 add more of J36 to your portfolio. 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 J36’s future growth? Take a look at our free research report of analyst consensus for J36’s outlook.
Past Track Record: Has J36 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 J36’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
