There's Reason For Concern Over Fraser and Neave, Limited's (SGX:F99) Price

With a median price-to-earnings (or "P/E") ratio of close to 12x in Singapore, you could be forgiven for feeling indifferent about Fraser and Neave, Limited's (SGX:F99) P/E ratio of 11.5x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen at a steady rate over the last year for Fraser and Neave, which is generally not a bad outcome. It might be that many expect the respectable earnings performance to only match most other companies over the coming period, which has kept the P/E from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Fraser and Neave

Although there are no analyst estimates available for Fraser and Neave, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.6% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 11% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 8.0% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that Fraser and Neave's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Fraser and Neave'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.

Our examination of Fraser and Neave revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Fraser and Neave (1 is potentially serious!) that you should be aware of.

If you're unsure about the strength of Fraser and Neave's 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.