Should We Worry About SATS Ltd.’s (SGX:S58) P/E Ratio?

Kari Hurd

Mon, Dec 24, 2018, 7:07 PM

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use SATS Ltd.’s (SGX:S58) P/E ratio to inform your assessment of the investment opportunity. SATS has a P/E ratio of 19.91, based on the last twelve months. That is equivalent to an earnings yield of about 5.0%.

Check out our latest analysis for SATS

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for SATS:

P/E of 19.91 = SGD4.66 ÷ SGD0.23 (Based on the year to September 2018.)

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. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

SATS’s earnings per share were pretty steady over the last year. But EPS is up 8.5% over the last 5 years.

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

The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that SATS has a higher P/E than the average (10.2) P/E for companies in the infrastructure industry.

That means that the market expects SATS will outperform other companies in its industry. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.

Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits

Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.