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Is Tai Sin Electric Limited's (SGX:500) P/E Ratio Really That Good?

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The goal of this article is to teach you how to use price to earnings ratios (P/E ratios). We'll look at Tai Sin Electric Limited's (SGX:500) P/E ratio and reflect on what it tells us about the company's share price. What is Tai Sin Electric's P/E ratio? Well, based on the last twelve months it is 10.65. In other words, at today's prices, investors are paying SGD10.65 for every SGD1 in prior year profit.

See our latest analysis for Tai Sin Electric

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

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

Or for Tai Sin Electric:

P/E of 10.65 = SGD0.33 ÷ SGD0.031 (Based on the trailing twelve months to March 2019.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio means that investors are paying a higher price for each SGD1 of company earnings. 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 Tai Sin Electric Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio essentially measures market expectations of a company. You can see in the image below that the average P/E (11.3) for companies in the electrical industry is roughly the same as Tai Sin Electric's P/E.

SGX:500 Price Estimation Relative to Market, July 19th 2019

Tai Sin Electric's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Tai Sin Electric actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Most would be impressed by Tai Sin Electric earnings growth of 11% in the last year. But earnings per share are down 11% per year over the last five years.

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. 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.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

Tai Sin Electric's Balance Sheet

Net debt totals just 1.3% of Tai Sin Electric'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 Tai Sin Electric's P/E Ratio

Tai Sin Electric's P/E is 10.7 which is below average (13) in the SG market. The company does have a little debt, and EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified.

When the market is wrong about a stock, it gives savvy investors an opportunity. 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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

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.

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.