Yahoo Finance Does SBS Transit Ltd’s (SGX:S61) PE Ratio Warrant A Buy?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between SBS Transit Ltd (SGX:S61)’s fundamentals and stock market performance.
SBS Transit Ltd (SGX:S61) trades with a trailing P/E of 15.1x, which is lower than the industry average of 15.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for SBS Transit
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for S61
Price-Earnings Ratio = Price per share ÷ Earnings per share
S61 Price-Earnings Ratio = SGD2.6 ÷ SGD0.173 = 15.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as S61, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 15.1x, S61’s P/E is lower than its industry peers (16.4x). This implies that investors are undervaluing each dollar of S61’s earnings. Therefore, according to this analysis, S61 is an under-priced stock.
A few caveats
Before you jump to the conclusion that S61 is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to S61. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with S61, 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 S61 to are fairly valued by the market. If this does not hold, there is a possibility that S61’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on S61, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for S61’s future growth? Take a look at our free research report of analyst consensus for S61’s outlook.
Past Track Record: Has S61 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of S61’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
