This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Genting Singapore Limited’s (SGX:G13) P/E ratio could help you assess the value on offer. Genting Singapore has a P/E ratio of 16.48, based on the last twelve months. That means that at current prices, buyers pay SGD16.48 for every SGD1 in trailing yearly profits.
How Do I Calculate Genting Singapore’s Price To Earnings Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Genting Singapore:
P/E of 16.48 = SGD1.01 ÷ SGD0.061 (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. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Genting Singapore increased earnings per share by an impressive 17% over the last twelve months. And it has bolstered its earnings per share by 3.3% per year over the last five years. With that performance, you might expect an above average P/E ratio.
How Does Genting Singapore’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 (16.2) for companies in the hospitality industry is roughly the same as Genting Singapore’s P/E.
Its P/E ratio suggests that Genting Singapore shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Genting Singapore actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as the tenure of the board and management could help you form your own view on if that will happen.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. That means it doesn’t take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
How Does Genting Singapore’s Debt Impact Its P/E Ratio?
Since Genting Singapore holds net cash of S$2.9b, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Verdict On Genting Singapore’s P/E Ratio
Genting Singapore’s P/E is 16.5 which is above average (11.9) in the SG market. With cash in the bank the company has plenty of growth options — and it is already on the right track. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
You might be able to find a better buy than Genting 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 firstname.lastname@example.org.