This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll look at Union Steel Holdings Limited’s (SGX:BLA) P/E ratio and reflect on what it tells us about the company’s share price. What is Union Steel Holdings’s P/E ratio? Well, based on the last twelve months it is 12.87. That corresponds to an earnings yield of approximately 7.8%.
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Union Steel Holdings:
P/E of 12.87 = SGD0.35 ÷ SGD0.027 (Based on the year to March 2019.)
Is A High P/E Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. 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.
Does Union Steel Holdings Have A Relatively High Or Low P/E For Its Industry?
The P/E ratio essentially measures market expectations of a company. As you can see below Union Steel Holdings has a P/E ratio that is fairly close for the average for the commercial services industry, which is 13.2.
That indicates that the market expects Union Steel Holdings will perform roughly in line with other companies in its industry.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
In the last year, Union Steel Holdings grew EPS like Taylor Swift grew her fan base back in 2010; the 441% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 30% per year over 5 years.
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 investing in growth. That means taking on debt (or spending its cash).
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
So What Does Union Steel Holdings’s Balance Sheet Tell Us?
Net debt totals a substantial 113% of Union Steel Holdings’s market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you’re comparing it to other stocks.
The Verdict On Union Steel Holdings’s P/E Ratio
Union Steel Holdings’s P/E is 12.9 which is about average (13) in the SG market. It does have enough debt to add risk, although earnings growth was strong in the last year. The P/E suggests that the market is not convinced EPS will continue to improve strongly.
Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Union Steel Holdings. 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 firstname.lastname@example.org. 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.