Singapore Inc – PE Ratio not quite right

By Leong Sze Hian

“If Singapore Inc were a listed company, what would its market cap be? Think about it. My GDP, which is profit earned in a year, is S$210 billion. The price earning ratio on SGX – average is now 20….I calculated if Singapore Inc went IPO, it is a 4-trillion-dollar company.” – PM Lee, channelnewsasia

To the best of my knowledge, the concept of using the Price over Earnings Ratio (PE) has never been applied to countries.

However, for the sake of discussion and analysis, what are some possible contextual relationships between GDP and the earnings of a listed company?

Well, since we are in a sense venturing into the unknown, I shall try, subject to the caveat that I may really be trying a bit too hard, to be creative.

So, GDP is like output. For a company, output is not just earnings. It may be earnings, plus goods produced not sold, goods in process, increase in the value of assets, plant and equipment, returns on investments both realised and unrealised, etc.

So, we can see, though not very clearly, because we are dealing with a new concept, that equating earnings to GDP may overstate the so called PE ratio as a guide to the determinent of the price of a share listed on a stock exchange.

If earnings in relation to GDP is an over-inflated measure, then, what may be the closet equivalent?

Well, how about profits? Because profits in a company can be distributed or retained. For a country, can GDP be distributed as dividends? Obviously not. Therefore, if we try to stretch our imagination a bit, perhaps the only profits available for distribution are the foreign reserves and other investments in Singapore and abroad. But, at this point, we may run into the conceptualisation issue of whether the reserves and other assets can be distributed? If not, then, in a sense, maybe only the increase on the assets can be deemed as available for distribution, like in a company.

Would you pay 20 times PE for a company that is unlikely to ever be able to distribute profits using conventional analysis of value?

So, finally, what’s my best guess? – The incremental value of GDP per annum is perhaps the best equivalent to the profits of company.

But if we say profits should be used instead of earnings in determining the price of a country, we may be accused of being gramatically, literally, and dictionarily (if there is such a word) wrong.

However, the reality of this debate is perhaps that it maybe not so right in the first place. Otherwise, surely, someone else in history, would have applied this reasoning to the valuation of countries.

Using the PE ratio may mean that people like George Bush and others from countries with large GDPs, ought to be paid even more than the computations based on the initial rationale of pay as a percentage of 0.13 per cent of total Government expenditure, or 0.022 per cent of GDP