Does Isetan (Singapore) Limited's (SGX:I15) PE Ratio Warrant A Sell?

Isetan (Singapore) Limited (SGX:I15) trades with a trailing P/E of 46.8x, which is higher than the industry average of 20x. While this makes I15 appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Isetan (Singapore)

What you need to know about the P/E ratio

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as I15, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

At 46.8x, I15’s P/E is higher than its industry peers (20x). This implies that investors are overvaluing each dollar of I15’s earnings. Therefore, according to this analysis, I15 is an over-priced stock.

A few caveats

However, before you rush out to sell your I15 shares, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to I15. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with I15, then I15’s P/E would naturally be higher since investors would reward I15’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with I15, I15’s P/E would again be higher since investors would reward I15’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing I15 to are fairly valued by the market. If this does not hold, there is a possibility that I15’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in I15. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

1. Financial Health: Is I15’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

2. Past Track Record: Has I15 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of I15's historicals for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.