When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 12x, you may consider Sunningdale Tech Ltd (SGX:BHQ) as a stock to potentially avoid with its 16.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
Sunningdale Tech has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.free report on Sunningdale Tech.
How Is Sunningdale Tech's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as Sunningdale Tech's is when the company's growth is on track to outshine the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.5%. This means it has also seen a slide in earnings over the longer-term as EPS is down 66% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 17% per annum as estimated by the two analysts watching the company. That's not great when the rest of the market is expected to grow by 6.1% per year.
In light of this, it's alarming that Sunningdale Tech's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Final Word
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.
We've established that Sunningdale Tech currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Sunningdale Tech that you need to be mindful of.
If these risks are making you reconsider your opinion on Sunningdale Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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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