This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We’ll show how you can use China Aviation Oil (Singapore) Corporation Ltd’s (SGX:G92) P/E ratio to inform your assessment of the investment opportunity. China Aviation Oil (Singapore) has a price to earnings ratio of 8.02, based on the last twelve months. That corresponds to an earnings yield of approximately 12%.
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How Do I Calculate A Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for China Aviation Oil (Singapore):
P/E of 8.02 = $0.85 (Note: this is the share price in the reporting currency, namely, USD ) ÷ $0.11 (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. 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 Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the ‘E’ increases, over time. 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.
China Aviation Oil (Singapore) saw earnings per share improve by -3.3% last year. And it has bolstered its earnings per share by 9.7% per year over the last five years.
How Does China Aviation Oil (Singapore)’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. The image below shows that China Aviation Oil (Singapore) has a higher P/E than the average (7) P/E for companies in the oil and gas industry.
China Aviation Oil (Singapore)’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 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
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn’t take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Is Debt Impacting China Aviation Oil (Singapore)’s P/E?
Since China Aviation Oil (Singapore) holds net cash of US$240m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On China Aviation Oil (Singapore)’s P/E Ratio
China Aviation Oil (Singapore)’s P/E is 8 which is below average (11.7) in the SG market. Recent earnings growth wasn’t bad. And the healthy balance sheet means the company can sustain growth while the P/E suggests shareholders don’t think it will.
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 free visual report on analyst forecasts could hold they key to an excellent investment decision.
You might be able to find a better buy than China Aviation Oil (Singapore). 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).
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 email@example.com.