Pacific Radiance Ltd.'s (SGX:RXS) Earnings Are Not Doing Enough For Some Investors

Pacific Radiance Ltd.'s (SGX:RXS) price-to-earnings (or "P/E") ratio of 5.5x might make it look like a strong buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 15x and even P/E's above 25x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Pacific Radiance's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Pacific Radiance

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Pacific Radiance would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 94% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.4% each year as estimated by the dual analysts watching the company. With the market predicted to deliver 9.0% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Pacific Radiance's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Pacific Radiance'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.

We've established that Pacific Radiance maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for Pacific Radiance (2 can't be ignored!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.