Why Ship Finance International Limited’s (NYSE:SFL) High P/E Ratio Isn’t Necessarily A Bad Thing
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll look at Ship Finance International Limited’s (NYSE:SFL) P/E ratio and reflect on what it tells us about the company’s share price. Ship Finance International has a price to earnings ratio of 13.72, based on the last twelve months. In other words, at today’s prices, investors are paying $13.72 for every $1 in prior year profit.
View our latest analysis for Ship Finance International
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 Ship Finance International:
P/E of 13.72 = $11.85 ÷ $0.86 (Based on the year to September 2018.)
Is A High P/E Ratio Good?
A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That is not a good or a bad thing per se, but a high P/E does imply buyers are optimistic about the future.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. 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.
Ship Finance International’s earnings per share fell by 26% in the last twelve months. And EPS is down 2.9% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
How Does Ship Finance International’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. The image below shows that Ship Finance International has a higher P/E than the average (11.9) P/E for companies in the shipping industry.
That means that the market expects Ship Finance International will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future), by taking on debt (or spending its remaining cash).
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.
How Does Ship Finance International’s Debt Impact Its P/E Ratio?
Net debt totals a substantial 160% of Ship Finance International’s market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Ship Finance International’s P/E Ratio
Ship Finance International has a P/E of 13.7. That’s below the average in the US market, which is 16.8. The P/E reflects market pessimism that probably arises from the lack of recent EPS growth, paired with significant leverage.
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.’ 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.
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.
