P/E ratios draw SET scrutiny

High figures could indicate overvaluation

The number of listed firms with a price-to-earnings (P/E) ratio above 40 times has fallen from 180 to 152 in the wake of last year's stunning earnings, says Chanitr Charnchainarong, president of the Market for Alternative Investment.

Nonetheless, to prevent stock speculation amid the market bull run and brisk trade volume, the Stock Exchange of Thailand since January has asked brokerages to keep an eye out for possible speculative activity in stocks with a P/E ratio of 40 times or more.

The P/E looks at the relationship between a stock's price and the underlying company's earnings. A high P/E ratio is an indication of overvaluation.

Buying a stock that comes under the SET's cash balance list requires a full amount of deposit before executing. A high P/E is one measurement of stocks listed in the cash balance account.

Still, the SET has tightened regulations by extending the period required for cash trading in stocks on the cash balance list from three weeks to six, effective March 1.

Mr Chanitr said the higher sales and earnings of companies listed on the SET and the MAI are positive factors boosting the Thai bourses' market capitalisation, trade liquidity and share prices.

Companies listed on the SET and the MAI reported historic highs for sales and profits last year.

A recent statement said 469 SET-listed firms or 96.9% of the 484 companies excluding those in the non-compliance and non-performing group reported combined sales of 10.4 trillion baht and an aggregate net profit of 727 billion last year. In terms of net profit, the industrial sector was the only one posting lower earnings.

Aggregate sales and net profit of MAI-listed companies reached 108 billion baht and 5.87 billion, respectively.

In addition to strong profits, the financial status of listed companies excluding financial institutions was healthy at the end of last year, with a debt-to-equity ratio of 1.23.

The benchmark SET index has risen by 12.6% this year, closing at 1,566.92 points on Friday in heavy trade worth 72.1 billion baht.

About the author

Writer: Darana Chudasri
Position: Business Reporter