Is Singapore Technologies Engineering Ltd's (SGX:S63) P/E Ratio Really That Good?

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll apply a basic P/E ratio analysis to Singapore Technologies Engineering Ltd's (SGX:S63), to help you decide if the stock is worth further research. Singapore Technologies Engineering has a P/E ratio of 22.69, based on the last twelve months. In other words, at today's prices, investors are paying SGD22.69 for every SGD1 in prior year profit.

Check out our latest analysis for Singapore Technologies Engineering

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

The formula for P/E is:

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

Or for Singapore Technologies Engineering:

P/E of 22.69 = SGD3.84 ÷ SGD0.17 (Based on the year to June 2019.)

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. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.

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

We can get an indication of market expectations by looking at the P/E ratio. If you look at the image below, you can see Singapore Technologies Engineering has a lower P/E than the average (28.8) in the aerospace & defense industry classification.

Its relatively low P/E ratio indicates that Singapore Technologies Engineering shareholders think it will struggle to do as well as other companies in its industry classification.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Singapore Technologies Engineering's earnings per share were pretty steady over the last year. And it has shrunk its earnings per share by 1.5% per year over the last five years. So we might expect a relatively low P/E. The company could impress by growing EPS, in the future. I would further inform my view by checking insider buying and selling., among other things.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Singapore Technologies Engineering's P/E?

Net debt totals 11% of Singapore Technologies Engineering's market cap. It would probably deserve a higher P/E ratio if it was net cash, since it would have more options for growth.

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

Singapore Technologies Engineering trades on a P/E ratio of 22.7, which is above its market average of 13.3. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.

Investors should be looking to buy stocks that the market is wrong about. 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 free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Singapore Technologies Engineering. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.