Yahoo Finance Does Noah Holdings Limited’s (NYSE:NOAH) PE Ratio Signal A Buying Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Noah Holdings Limited (NYSE:NOAH) is trading with a trailing P/E of 17.5x, which is lower than the industry average of 22.9x. 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.
Check out our latest analysis for Noah Holdings
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 NOAH
Price-Earnings Ratio = Price per share ÷ Earnings per share
NOAH Price-Earnings Ratio = CN¥242.11 ÷ CN¥13.812 = 17.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to NOAH, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since NOAH’s P/E of 17.5 is lower than its industry peers (22.9), it means that investors are paying less for each dollar of NOAH’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in US including Viking Energy Group, TheStreet and China Internet Nationwide Financial Services. One could put it like this: the market is pricing NOAH as if it is a weaker company than the average company in its industry.
A few caveats
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NOAH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with NOAH, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing NOAH to are fairly valued by the market. If this is violated, NOAH’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on NOAH, 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 NOAH’s future growth? Take a look at our free research report of analyst consensus for NOAH’s outlook.
Past Track Record: Has NOAH 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 NOAH’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.
