Should You Be Tempted To Sell Singapore Technologies Engineering Ltd (SGX:S63) Because Of Its P/E Ratio?

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This article is for investors who would like to improve their understanding of 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 24.04, based on the last twelve months. That means that at current prices, buyers pay SGD24.04 for every SGD1 in trailing yearly profits.

See our latest analysis for Singapore Technologies Engineering

How Do I Calculate Singapore Technologies Engineering's Price To Earnings Ratio?

The formula for price to earnings is:

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

Or for Singapore Technologies Engineering:

P/E of 24.04 = SGD3.91 ÷ SGD0.16 (Based on the trailing twelve months to March 2019.)

Is A High P/E Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn't necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.

Singapore Technologies Engineering's earnings per share fell by 2.6% in the last twelve months. And it has shrunk its earnings per share by 2.8% per year over the last five years. So it would be surprising to see a high P/E.

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

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (18.8) for companies in the aerospace & defense industry is lower than Singapore Technologies Engineering's P/E.

Singapore Technologies Engineering's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Singapore Technologies Engineering's Balance Sheet Tell Us?

Net debt totals just 1.6% of Singapore Technologies Engineering's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Singapore Technologies Engineering's P/E Ratio

Singapore Technologies Engineering's P/E is 24 which is above average (12.6) in the SG market. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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 report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Singapore Technologies Engineering. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.