Is Singapore Technologies Engineering Ltd's (SGX:S63) High P/E Ratio A Problem For Investors?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). To keep it practical, we'll show how Singapore Technologies Engineering Ltd's (SGX:S63) P/E ratio could help you assess the value on offer. Singapore Technologies Engineering has a P/E ratio of 21.31, based on the last twelve months. That corresponds to an earnings yield of approximately 4.7%.

View our latest analysis for Singapore Technologies Engineering

How Do You Calculate Singapore Technologies Engineering's P/E Ratio?

The formula for price to earnings is:

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

Or for Singapore Technologies Engineering:

P/E of 21.31 = SGD3.74 ÷ SGD0.18 (Based on the trailing twelve months 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

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Singapore Technologies Engineering increased earnings per share by 8.2% last year. And its annual EPS growth rate over 3 years is 1.2%. Unfortunately, earnings per share are down 2.6% a year, over 5 years.

How Does Singapore Technologies Engineering's P/E Ratio Compare To Its Peers?

The P/E ratio essentially measures market expectations of a company. As you can see below, Singapore Technologies Engineering has a higher P/E than the average company (17.1) in the aerospace & defense industry.

Singapore Technologies Engineering's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. 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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Singapore Technologies Engineering's Balance Sheet

Net debt totals just 0.2% of Singapore Technologies Engineering's market cap. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Singapore Technologies Engineering's P/E Ratio

Singapore Technologies Engineering trades on a P/E ratio of 21.3, which is above the SG market average of 11.9. Given the debt is only modest, and earnings are already moving in the right direction, it's not surprising that the market expects continued improvement.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine.' So this freereport on the analyst consensus forecasts could help you make a master move on this stock.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.