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Do You Know What GuocoLand Limited's (SGX:F17) P/E Ratio Means?

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Simply Wall St
·4 min read
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This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We'll show how you can use GuocoLand Limited's (SGX:F17) P/E ratio to inform your assessment of the investment opportunity. GuocoLand has a P/E ratio of 6.81, based on the last twelve months. That is equivalent to an earnings yield of about 14.7%.

Check out our latest analysis for GuocoLand

How Do You Calculate A P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for GuocoLand:

P/E of 6.81 = SGD1.68 ÷ SGD0.25 (Based on the year to December 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. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

How Does GuocoLand's P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see GuocoLand has a lower P/E than the average (11.4) in the real estate industry classification.

SGX:F17 Price Estimation Relative to Market, March 2nd 2020
SGX:F17 Price Estimation Relative to Market, March 2nd 2020

Its relatively low P/E ratio indicates that GuocoLand shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

GuocoLand increased earnings per share by a whopping 40% last year. And its annual EPS growth rate over 3 years is 28%. I'd therefore be a little surprised if its P/E ratio was not relatively high.

Remember: P/E Ratios Don't Consider The Balance Sheet

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does GuocoLand's Debt Impact Its P/E Ratio?

Net debt totals a substantial 281% of GuocoLand's market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On GuocoLand's P/E Ratio

GuocoLand's P/E is 6.8 which is below average (13.0) in the SG market. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If the company can continue to grow earnings, then the current P/E may be unjustifiably low.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. 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.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.

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. Thank you for reading.