Why We're Not Concerned About City Developments Limited's (SGX:C09) Share Price

With a price-to-earnings (or "P/E") ratio of 32.9x City Developments Limited (SGX:C09) may be sending very bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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City Developments hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for City Developments

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

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. The last three years don't look nice either as the company has shrunk EPS by 84% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 35% per year as estimated by the twelve analysts watching the company. With the market only predicted to deliver 9.3% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that City Developments' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of City Developments' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

It is also worth noting that we have found 3 warning signs for City Developments (1 is a bit concerning!) that you need to take into consideration.

If you're unsure about the strength of City Developments' 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.