IFS Capital Limited's (SGX:I49) Shares Climb 25% But Its Business Is Yet to Catch Up

IFS Capital Limited (SGX:I49) shareholders have had their patience rewarded with a 25% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Since its price has surged higher, IFS Capital's price-to-earnings (or "P/E") ratio of 18.3x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at IFS Capital over the last year, which is not ideal at all. 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.

Check out our latest analysis for IFS Capital

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 IFS Capital's earnings, revenue and cash flow.

How Is IFS Capital's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as IFS Capital's is when the company's growth is on track to outshine the market decidedly.

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 20%. This means it has also seen a slide in earnings over the longer-term as EPS is down 65% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 15% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that IFS Capital is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From IFS Capital's P/E?

The strong share price surge has got IFS Capital's P/E rushing to great heights as well. 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.

Our examination of IFS Capital revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term 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 5 warning signs for IFS Capital (2 shouldn't be ignored!) that you need to be mindful of.

Of course, you might also be able to find a better stock than IFS Capital. 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.