Sapphire Corporation Limited (SGX:BRD) Looks Just Right With A 72% Price Jump

Sapphire Corporation Limited (SGX:BRD) shareholders have had their patience rewarded with a 72% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 3.8% isn't as attractive.

Following the firm bounce in price, Sapphire's price-to-earnings (or "P/E") ratio of 17.1x might make it look like a strong sell right now compared to the market in Singapore, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Sapphire's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sapphire

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sapphire will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sapphire's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 67%. Even so, admirably EPS has lifted 93% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 8.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Sapphire's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Sapphire's P/E?

Shares in Sapphire have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Sapphire revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Sapphire (1 is a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Sapphire, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.