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# Don’t Sell Sheng Siong Group Ltd (SGX:OV8) Before You Read This

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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 Sheng Siong Group Ltd’s (SGX:OV8), to help you decide if the stock is worth further research. Sheng Siong Group has a price to earnings ratio of 22.38, based on the last twelve months. That corresponds to an earnings yield of approximately 4.5%.

### How Do You Calculate A P/E Ratio?

The formula for price to earnings is:

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

Or for Sheng Siong Group:

P/E of 22.38 = SGD1.07 ÷ SGD0.048 (Based on the trailing twelve months to March 2019.)

### Is A High Price-to-Earnings 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

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Sheng Siong Group had pretty flat EPS growth in the last year. But over the longer term (5 years) earnings per share have increased by 10%.

### How Does Sheng Siong Group’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. As you can see below, Sheng Siong Group has a higher P/E than the average company (20) in the consumer retailing industry.

Sheng Siong Group’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. 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.

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 Sheng Siong Group’s Balance Sheet Tell Us?

The extra options and safety that comes with Sheng Siong Group’s S\$86m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

### The Bottom Line On Sheng Siong Group’s P/E Ratio

Sheng Siong Group’s P/E is 22.4 which is above average (12.7) in the SG market. EPS was up modestly better over the last twelve months. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Sheng Siong Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.