Should You Be Tempted To Sell Second Chance Properties Ltd (SGX:528) Because Of Its P/E Ratio?
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 Second Chance Properties Ltd’s (SGX:528) P/E ratio to inform your assessment of the investment opportunity. Second Chance Properties has a price to earnings ratio of 28.82, based on the last twelve months. In other words, at today’s prices, investors are paying SGD28.82 for every SGD1 in prior year profit.
Check out our latest analysis for Second Chance Properties
Want to participate in a short research study? Help shape the future of investing tools and receive a $60 prize!
How Do You Calculate A P/E Ratio?
The formula for price to earnings is:
Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)
Or for Second Chance Properties:
P/E of 28.82 = SGD0.23 ÷ SGD0.0078 (Based on the trailing twelve months to November 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio means that investors are paying a higher price for each SGD1 of company 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 Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. A higher P/E should indicate the stock is expensive relative to others — and that may encourage shareholders to sell.
Second Chance Properties’s earnings per share fell by 44% in the last twelve months. And EPS is down 50% a year, over the last 5 years. This might lead to muted expectations.
How Does Second Chance Properties’s P/E Ratio Compare To Its Peers?
We can get an indication of market expectations by looking at the P/E ratio. You can see in the image below that the average P/E (8.1) for companies in the specialty retail industry is a lot lower than Second Chance Properties’s P/E.
That means that the market expects Second Chance Properties will outperform other companies in its industry. Clearly the market expects growth, but it isn’t guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.
Second Chance Properties’s Balance Sheet
Second Chance Properties has net cash of S$1.9m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.
The Verdict On Second Chance Properties’s P/E Ratio
Second Chance Properties has a P/E of 28.8. That’s higher than the average in the SG market, which is 11.8. Falling earnings per share is probably keeping traditional value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will.
Investors have an opportunity when market expectations about a stock are wrong. 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 could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Second Chance Properties. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 editorial-team@simplywallst.com.
