Unfortunately for some shareholders, the SATS (SGX:S58) share price has dived 36% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 44% in that time.

Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for SATS

How Does SATS's P/E Ratio Compare To Its Peers?

SATS's P/E of 14.29 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (9.7) for companies in the infrastructure industry is lower than SATS's P/E.

Its relatively high P/E ratio indicates that SATS shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

SATS shrunk earnings per share by 15% over the last year. But over the longer term (5 years) earnings per share have increased by 3.7%. And EPS is down 2.7% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does SATS's Debt Impact Its P/E Ratio?

SATS has net cash of S$109m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.