Earnings Working Against First Resources Limited's (SGX:EB5) Share Price

First Resources Limited's (SGX:EB5) price-to-earnings (or "P/E") ratio of 7.3x might make it look like a buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 13x and even P/E's above 23x 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 limited.

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With earnings growth that's superior to most other companies of late, First Resources has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for First Resources

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

How Is First Resources' Growth Trending?

In order to justify its P/E ratio, First Resources would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 70% gain to the company's bottom line. 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.

Looking ahead now, EPS is anticipated to slump, contracting by 0.7% per annum during the coming three years according to the three analysts following the company. That's not great when the rest of the market is expected to grow by 8.9% each year.

In light of this, it's understandable that First Resources' 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 Final Word

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 First Resources' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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 2 warning signs for First Resources (1 is a bit concerning!) that you should be aware of.

If you're unsure about the strength of First Resources' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.