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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to China Aviation Oil (Singapore) Corporation Ltd's (SGX:G92), to help you decide if the stock is worth further research. China Aviation Oil (Singapore) has a P/E ratio of 7.81, based on the last twelve months. In other words, at today's prices, investors are paying SGD7.81 for every SGD1 in prior year profit.
View our latest analysis for China Aviation Oil (Singapore)
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for China Aviation Oil (Singapore):
P/E of 7.81 = SGD0.84 (Note: this is the share price in the reporting currency, namely, USD ) ÷ SGD0.11 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each SGD1 the company has earned over the last year. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.
Does China Aviation Oil (Singapore) Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. We can see in the image below that the average P/E (10.3) for companies in the oil and gas industry is higher than China Aviation Oil (Singapore)'s P/E.
This suggests that market participants think China Aviation Oil (Singapore) will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
China Aviation Oil (Singapore) maintained roughly steady earnings over the last twelve months. But EPS is up 4.9% over the last 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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.