Here's How P/E Ratios Can Help Us Understand Samudera Shipping Line Ltd (SGX:S56)
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll look at Samudera Shipping Line Ltd's (SGX:S56) P/E ratio and reflect on what it tells us about the company's share price. Looking at earnings over the last twelve months, Samudera Shipping Line has a P/E ratio of 6.50. That means that at current prices, buyers pay SGD6.50 for every SGD1 in trailing yearly profits.
Check out our latest analysis for Samudera Shipping Line
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Share Price (in reporting currency) ÷ Earnings per Share (EPS)
Or for Samudera Shipping Line:
P/E of 6.50 = SGD0.11 (Note: this is the share price in the reporting currency, namely, USD ) ÷ SGD0.02 (Based on the trailing twelve months to June 2019.)
Is A High Price-to-Earnings Ratio Good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. All else being equal, it's better to pay a low price -- but as Warren Buffett said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
How Does Samudera Shipping Line's P/E Ratio Compare To Its Peers?
The P/E ratio essentially measures market expectations of a company. The image below shows that Samudera Shipping Line has a lower P/E than the average (8.5) P/E for companies in the shipping industry.
Its relatively low P/E ratio indicates that Samudera Shipping Line shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Samudera Shipping Line saw earnings per share improve by -8.0% last year. In contrast, EPS has decreased by 3.1%, annually, over 5 years.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.
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 Samudera Shipping Line's P/E?
Net debt totals just 8.1% of Samudera Shipping Line's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Verdict On Samudera Shipping Line's P/E Ratio
Samudera Shipping Line's P/E is 6.5 which is below average (13.1) in the SG market. EPS grew over the last twelve months, and debt levels are quite reasonable. If you believe growth will continue - or even increase - then the low P/E may signify opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
But note: Samudera Shipping Line 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.
