Earnings Not Telling The Story For Fraser and Neave, Limited (SGX:F99)

There wouldn't be many who think Fraser and Neave, Limited's (SGX:F99) price-to-earnings (or "P/E") ratio of 11.4x is worth a mention when the median P/E in Singapore is similar at about 12x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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The earnings growth achieved at Fraser and Neave over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Fraser and Neave

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fraser and Neave will help you shine a light on its historical performance.

Does Growth Match The P/E?

In order to justify its P/E ratio, Fraser and Neave would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 7.9% gain to the company's bottom line. The latest three year period has also seen a 17% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Fraser and Neave is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Fraser and Neave'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.

Our examination of Fraser and Neave revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Fraser and Neave (including 1 which is a bit unpleasant).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.