Yahoo Finance Should You Be Tempted To Buy Jardine Strategic Holdings Limited (SGX:J37) At Its Current PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Jardine Strategic Holdings Limited (SGX:J37) is trading with a trailing P/E of 7.5x, which is lower than the industry average of 29.5x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for Jardine Strategic Holdings
Breaking down the Price-Earnings 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.
P/E Calculation for J37
Price-Earnings Ratio = Price per share ÷ Earnings per share
J37 Price-Earnings Ratio = $36.25 ÷ $4.81 = 7.5x
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 J37, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since J37’s P/E of 7.5 is lower than its industry peers (29.5), it means that investors are paying less for each dollar of J37’s earnings. This multiple is a median of profitable companies of 4 Industrials companies in SG including Jardine Matheson Holdings, Sembcorp Industries and Keppel. You can think of it like this: the market is suggesting that J37 is a weaker business than the average comparable company.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to J37, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with J37, 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 J37 to are fairly valued by the market. If this does not hold true, J37’s lower P/E ratio may be because firms in our peer group are 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 add more of J37 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for J37’s future growth? Take a look at our free research report of analyst consensus for J37’s outlook.
Past Track Record: Has J37 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 J37’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.
