Yahoo Finance Is It Time To Sell Steamships Trading Company Limited (ASX:SST) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Steamships Trading Company Limited (ASX:SST)’s fundamentals and stock market performance.
Steamships Trading Company Limited (ASX:SST) trades with a trailing P/E of 33.6x, which is higher than the industry average of 14.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Steamships Trading
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 SST
Price-Earnings Ratio = Price per share ÷ Earnings per share
SST Price-Earnings Ratio = PGK44.95 ÷ PGK1.339 = 33.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SST, 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. SST’s P/E of 33.6x is higher than its industry peers (14.6x), which implies that each dollar of SST’s earnings is being overvalued by investors. Therefore, according to this analysis, SST is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your SST shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SST, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SST, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SST to are fairly valued by the market. If this does not hold, there is a possibility that SST’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on SST, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 SST’s future growth? Take a look at our free research report of analyst consensus for SST’s outlook.
Past Track Record: Has SST 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 SST’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.
