Isetan (Singapore) Limited (SGX:I15) is trading with a trailing P/E of 47.1x, which is higher than the industry average of 19.4x. While this makes I15 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Isetan (Singapore)
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for I15
Price-Earnings Ratio = Price per share ÷ Earnings per share
I15 Price-Earnings Ratio = SGD3.83 ÷ SGD0.081 = 47.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as I15, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since I15’s P/E of 47.1x is higher than its industry peers (19.4x), it means that investors are paying more than they should for each dollar of I15’s earnings. As such, our analysis shows that I15 represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your I15 shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to I15, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with I15, 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 I15 to are fairly valued by the market. If this does not hold true, I15’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
To help readers see pass 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.