In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we'll show how Singapore Shipping Corporation Limited's (SGX:S19) P/E ratio could help you assess the value on offer. What is Singapore Shipping's P/E ratio? Well, based on the last twelve months it is 9.2. That is equivalent to an earnings yield of about 11%.
Check out our latest analysis for Singapore Shipping
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share (in the reporting currency) ÷ Earnings per Share (EPS)
Or for Singapore Shipping:
P/E of 9.2 = $0.21 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.023 (Based on the year to December 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. 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.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Singapore Shipping saw earnings per share improve by -6.8% last year. And earnings per share have improved by 6.4% annually, over the last five years. Unfortunately, earnings per share are down 1.6% a year, over 3 years.
Does Singapore Shipping 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. You can see in the image below that the average P/E (7.8) for companies in the shipping industry is lower than Singapore Shipping's P/E.
That means that the market expects Singapore Shipping will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. 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.