Valuetronics Holdings Limited’s (SGX:BN2) price-to-earnings (or “P/E”) ratio of 7.9x might make it look like a buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 13x and even P/E’s above 22x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
With earnings that are retreating more than the market’s of late, Valuetronics Holdings has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.free report is a great place to start.
What Are Growth Metrics Telling Us About The Low P/E?
There’s an inherent assumption that a company should underperform the market for P/E ratios like Valuetronics Holdings’ to be considered reasonable.
Retrospectively, the last year delivered a frustrating 11% decrease to the company’s bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in EPS. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been mostly respectable for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 5.6% each year during the coming three years according to the five analysts following the company. Meanwhile, the broader market is forecast to expand by 1.7% per annum, which paints a poor picture.
With this information, we are not surprised that Valuetronics Holdings is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
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 Valuetronics Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. It’s hard to see the share price rising strongly in the near future under these circumstances.
We don’t want to rain on the parade too much, but we did also find 2 warning signs for Valuetronics Holdings (1 doesn’t sit too well with us!) that you need to be mindful of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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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