Is It Time To Sell Singapore Airlines Limited (SGX:C6L) Based Off Its PE Ratio?
Singapore Airlines Limited (SGX:C6L) trades with a trailing P/E of 22.4x, which is higher than the industry average of 10.8x. While this makes C6L appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Singapore Airlines
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for C6L
Price-Earnings Ratio = Price per share ÷ Earnings per share
C6L Price-Earnings Ratio = SGD10.83 ÷ SGD0.485 = 22.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to C6L, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 22.4x, C6L’s P/E is higher than its industry peers (10.8x). This implies that investors are overvaluing each dollar of C6L’s earnings. Therefore, according to this analysis, C6L is an over-priced stock.
A few caveats
Before you jump to the conclusion that C6L should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to C6L, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with C6L, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing C6L to are fairly valued by the market. If this does not hold true, C6L’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to C6L. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for C6L’s future growth? Take a look at our free research report of analyst consensus for C6L’s outlook.
Past Track Record: Has C6L been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of C6L’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass 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.
