Yahoo Finance Is Sembcorp Industries Ltd (SGX:U96) A Sell At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Sembcorp Industries Ltd (SGX:U96).
Sembcorp Industries Ltd (SGX:U96) trades with a trailing P/E of 34.1x, which is higher than the industry average of 17.8x. While U96 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Sembcorp Industries
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 U96
Price-Earnings Ratio = Price per share ÷ Earnings per share
U96 Price-Earnings Ratio = SGD2.79 ÷ SGD0.0819 = 34.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to U96, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. U96’s P/E of 34.1x is higher than its industry peers (14.4x), which implies that each dollar of U96’s earnings is being overvalued by investors. Therefore, according to this analysis, U96 is an over-priced stock.
A few caveats
However, before you rush out to sell your U96 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to U96, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with U96, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing U96 to are fairly valued by the market. If this does not hold, there is a possibility that U96’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to U96. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 U96’s future growth? Take a look at our free research report of analyst consensus for U96’s outlook.
Past Track Record: Has U96 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 U96’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.
