Yahoo Finance Should You Be Tempted To Sell SIA Engineering Company Limited (SGX:S59) Because Of Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between SIA Engineering Company Limited (SGX:S59)’s fundamentals and stock market performance.
SIA Engineering Company Limited (SGX:S59) is currently trading at a trailing P/E of 19.3x, which is higher than the industry average of 13.5x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, 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. See our latest analysis for SIA Engineering
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 S59
Price-Earnings Ratio = Price per share ÷ Earnings per share
S59 Price-Earnings Ratio = SGD3.18 ÷ SGD0.165 = 19.3x
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 S59, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. S59’s P/E of 19.3x is higher than its industry peers (18x), which implies that each dollar of S59’s earnings is being overvalued by investors. As such, our analysis shows that S59 represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your S59 shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to S59. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with S59, 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 S59 to are fairly valued by the market. If this is violated, S59’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on S59, the overvaluation of the stock may mean it is a good time to reduce 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for S59’s future growth? Take a look at our free research report of analyst consensus for S59’s outlook.
Past Track Record: Has S59 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 S59’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.