With a price-to-earnings (or “P/E”) ratio of 28.3x Sheng Siong Group Ltd (SGX:OV8) may be sending very 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. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Sheng Siong Group has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Sheng Siong Group
What Are Growth Metrics Telling Us About The High P/E?
The only time you’d be truly comfortable seeing a P/E as steep as Sheng Siong Group’s is when the company’s growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The strong recent performance means it was also able to grow EPS by 34% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 5.8% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 2.9% each year, which is noticeably less attractive.
In light of this, it’s understandable that Sheng Siong Group’s P/E sits above the majority of other companies. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Sheng Siong Group’s P/E
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Sheng Siong Group’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.
Many other vital risk factors can be found on the company’s balance sheet. Take a look at our free balance sheet analysis for Sheng Siong Group with six simple checks on some of these key factors.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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