Japan Aviation Electronics is a Japanese based manufacturer of electronic components and equipment. Similarly, Jiangxi Hongdu Aviation Industry Co Ltd. is primarily concerned with training aircraft business as well as a shift of contract business. This essay, therefore, seeks to present a short report discussing the valuation of Japan Aviation Electronics Industry and Jiangxi Hongdu Aviation Industry Co Ltd.
Japan Aviation Electronics Industry's price-earnings ratio is 148M JPY while Jiangxi Hongdu Aviation Industry Co Ltd.'s earnings per share are 64,9 M CNY (Reuters, 2019). Japan Aviation’s higher price earnings ratio means that its investors are paying more for each unit the net income. Thus, the stock is more expensive compared to Jiangxi Hongdu. It also implies that the current investor demand for Japan Aviation's share is high. The disparity in price earnings ratio between the two companies is due to the market opinion causing the price to be lower concerning the company's current earnings, and this is often attributable to the fact that future earnings will be lacklustre and the stock market is anticipating this (Reuters, 2019).
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Japan Aviation Electronics’ current price is 124.53M JPY while Jiangxi Hongdu Aviation Industry Co Ltd.’s current price is 0.16. Similarly, based on the TTM is 148.9 and 30.4 respectively (Market Screener, 2019); (Market Screener, 2019) Also, the estimated share price based on the industry’s TTM P/E and mean year-end Earnings estimate the price is 264.83 and 11.56 respectively for the selected firm and the competing firm. The firm’s current price is lower than the estimated price. It is instrumental to compare firms operating in the same industry since it only involves high growth companies in the same industry using the industry average. A comparison using the overall market price earnings ratio is also useful since it helps investors’ know if the price-earnings ratio of a particular stock segment is keeping pace with broader trends.
Jiangxi Hongdu Aviation Industry Co Ltd. is overvalued because its stock's price-earnings ratio is less than the industry average compared to the competing firms. Therefore, the two firms trading in the same industry are trading at similar price-earnings ratios. The industry average price earnings ratio is consequently critical in estimating a firm's stock relative value. The firm's stock is overvalued because, after the valuation of its relative earnings and comparing its earnings to the market value using the price-earnings ratio, the company is trading at a price 50 times its earnings. Finance experts found that firm selling its stock for 50 times its earnings is likely overvalued and the case is similar to Jiangxi Hongdu Aviation Industry Co Ltd. It is a normal phenomenon that some company’s stock will continually trade at a price-earnings ratio that differs from the industry average and might sometimes never align with its competitors. Assessing whether a company’s stock is undervalued or overvalued is the right procedure for investors before investing. In several instances, financial analysts looking for stocks to invest look for overvalued companies with higher price-earnings ratios especially when compared to companies in the same industry. Stock for Jiangxi Hongdu Aviation Industry Co Ltd. is also overvalued because its earnings are 0.16 per share but if it were undervalued the earnings would be $10 per share, which applies to Japan Aviation Electronics Industry (Reuters, 2019).
Conclusively, before doing a valuation of a firm’s stock, investors must try to determine whether the firm is a great business or not since investing into great business at a forum is a long-term reward. In the context of the chosen industry, investing in Jiangxi Hongdu Aviation Industry Co Ltd.’s stocks will be a lucrative endeavor.
References
Market Screener (2019) Japan Aviation Electronics Industry Ltd. Retrieved from https://www.marketscreener.com/JAPAN-AVIATION-ELECTRONIC-6491988/financials/
Market Screener (2019). Jiangxi Hongdu Aviation Industry Co., Ltd. Retrieved from https://www.marketscreener.com/JIANGXI-HONGDU-AVIATION-I-9059393/financials/
Reuters (2019). Retrieved from https://www.reuters.com/finance/stocks/financial-highlights/6807.T
