Yahoo Finance How Does Sheng Siong Group's (SGX:OV8) P/E Compare To Its Industry, After Its Big Share Price Gain?
Sheng Siong Group (SGX:OV8) shares have had a really impressive month, gaining 35%, after some slippage. The full year gain of 35% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Check out our latest analysis for Sheng Siong Group
Does Sheng Siong Group Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 28.19 that there is some investor optimism about Sheng Siong Group. You can see in the image below that the average P/E (18.5) for companies in the consumer retailing industry is lower than Sheng Siong Group's P/E.
Its relatively high P/E ratio indicates that Sheng Siong Group shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Sheng Siong Group's earnings per share grew by 7.0% in the last twelve months. And earnings per share have improved by 8.5% annually, over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
So What Does Sheng Siong Group's Balance Sheet Tell Us?
Since Sheng Siong Group holds net cash of S$84m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Sheng Siong Group's P/E Ratio
Sheng Siong Group's P/E is 28.2 which is above average (10.8) in its market. Recent earnings growth wasn't bad. And the net cash position provides the company with multiple options. The high P/E suggests the market thinks further growth will come. What is very clear is that the market has become significantly more optimistic about Sheng Siong Group over the last month, with the P/E ratio rising from 20.8 back then to 28.2 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
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. 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.
