Subdued Growth No Barrier To Metro Holdings Limited's (SGX:M01) Price

Metro Holdings Limited's (SGX:M01) price-to-earnings (or "P/E") ratio of 19.1x might make it look like a sell right now compared to the market in Singapore, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Metro Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Metro Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Metro Holdings' earnings, revenue and cash flow.

Is There Enough Growth For Metro Holdings?

Metro Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. As a result, earnings from three years ago have also fallen 60% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 12% shows the market is more attractive on an annualised basis regardless.

In light of this, it's odd that Metro Holdings' P/E sits above the majority of other companies. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Metro Holdings revealed its sharp three-year contraction in earnings isn't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to shrink less severely. When we see below average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. Unless the company's relative performance improves markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Metro Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E 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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