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 Singapore Airlines Limited's (SGX:C6L) P/E ratio to inform your assessment of the investment opportunity. Singapore Airlines has a price to earnings ratio of 16.38, based on the last twelve months. That is equivalent to an earnings yield of about 6.1%.
How Do You Calculate Singapore Airlines's P/E Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Singapore Airlines:
P/E of 16.38 = SGD9.06 ÷ SGD0.55 (Based on the year to June 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 is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
Does Singapore Airlines Have A Relatively High Or Low P/E For Its Industry?
One good way to get a quick read on what market participants expect of a company is to look at its P/E ratio. The image below shows that Singapore Airlines has a P/E ratio that is roughly in line with the airlines industry average (16.3).
That indicates that the market expects Singapore Airlines will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Singapore Airlines saw earnings per share decrease by 41% last year. But it has grown its earnings per share by 19% per year over the last five years. And EPS is down 13% a year, over the last 3 years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
How Does Singapore Airlines's Debt Impact Its P/E Ratio?
Net debt is 40% of Singapore Airlines's market cap. While it's worth keeping this in mind, it isn't a worry.
The Bottom Line On Singapore Airlines's P/E Ratio
Singapore Airlines's P/E is 16.4 which is above average (13.0) in its market. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years.
Investors should be looking to buy stocks that the market is wrong about. 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 report on the analyst consensus forecasts could help you make a master move on this stock.
But note: Singapore Airlines 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 email@example.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.