Investors Appear Satisfied With Riverstone Holdings Limited's (SGX:AP4) Prospects As Shares Rocket 26%

Riverstone Holdings Limited (SGX:AP4) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Since its price has surged higher, given close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 11x, you may consider Riverstone Holdings as a stock to avoid entirely with its 20x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Riverstone Holdings has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Riverstone Holdings

Want the full picture on analyst estimates for the company? Then our free report on Riverstone Holdings will help you uncover what's on the horizon.

How Is Riverstone Holdings' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Riverstone Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 30%. This means it has also seen a slide in earnings over the longer-term as EPS is down 66% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 8.0% each year growth forecast for the broader market.

With this information, we can see why Riverstone Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Riverstone Holdings' P/E?

Shares in Riverstone Holdings have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Riverstone Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Riverstone Holdings is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.