City Developments Limited's (SGX:C09) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 14.2x City Developments Limited (SGX:C09) may be sending bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 11x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, City Developments has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for City Developments

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

Is There Enough Growth For City Developments?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 50% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 11% per annum over the next three years. With the market predicted to deliver 11% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that City Developments is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On City Developments' 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.

Our examination of City Developments' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for City Developments (of which 1 is a bit unpleasant!) you should know about.

If these risks are making you reconsider your opinion on City Developments, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.