Centurion Corporation Limited's (SGX:OU8) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 2.9x Centurion Corporation Limited (SGX:OU8) may be sending very bullish signals at the moment, given that almost half of all companies in Singapore have P/E ratios greater than 12x and even P/E's higher than 21x 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 so limited.

With earnings growth that's superior to most other companies of late, Centurion has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Centurion

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

How Is Centurion's Growth Trending?

In order to justify its P/E ratio, Centurion would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 203% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 4,655% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 25% per annum over the next three years. That's not great when the rest of the market is expected to grow by 9.7% per annum.

With this information, we are not surprised that Centurion is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Centurion maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Centurion has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

Of course, you might also be able to find a better stock than Centurion. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.