With a price-to-earnings (or “P/E”) ratio of 13.9x Fu Yu Corporation Limited (SGX:F13) may be sending bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 11x and even P/E’s lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.
Fu Yu certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report is a great place to start.
How Is Fu Yu’s Growth Trending?
There’s an inherent assumption that a company should outperform the market for P/E ratios like Fu Yu’s to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.8% last year. EPS has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 11% each year over the next three years. That’s shaping up to be materially higher than the 3.6% per annum growth forecast for the broader market.
With this information, we can see why Fu Yu is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We’ve established that Fu Yu maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example – Fu Yu has 2 warning signs we think you should be aware of.
You might be able to find a better investment than Fu Yu. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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