There's Reason For Concern Over Singapore Exchange Limited's (SGX:S68) Price

When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 12x, you may consider Singapore Exchange Limited (SGX:S68) as a stock to avoid entirely with its 20.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Singapore Exchange certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Singapore Exchange

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Singapore Exchange.

Is There Enough Growth For Singapore Exchange?

Singapore Exchange's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow EPS by 55% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 3.0% per annum as estimated by the analysts watching the company. With the market predicted to deliver 9.9% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Singapore Exchange'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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Singapore Exchange'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.

We've established that Singapore Exchange currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Singapore Exchange with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Singapore Exchange. 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.