Singapore Technologies Engineering Ltd's (SGX:S63) P/E Still Appears To Be Reasonable

Singapore Technologies Engineering Ltd's (SGX:S63) price-to-earnings (or "P/E") ratio of 22x 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 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With only a limited decrease in earnings compared to most other companies of late, Singapore Technologies Engineering has been doing relatively well. The P/E is probably high because investors think this comparatively better earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if earnings continue to dissolve.

Check out our latest analysis for Singapore Technologies Engineering

Keen to find out how analysts think Singapore Technologies Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Singapore Technologies Engineering would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 3.4% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 5.3% in aggregate. 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 generate growth of 17% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 6.1% per year, the company is positioned for a stronger earnings result.

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

What We Can Learn From Singapore Technologies Engineering's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Singapore Technologies Engineering's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Singapore Technologies Engineering that you should be aware of.

Of course, you might also be able to find a better stock than Singapore Technologies Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.