The Hour Glass Limited's (SGX:AGS) Shares Not Telling The Full Story

By
Simply Wall St
Published
September 01, 2020
SGX:AGS

When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 13x, you may consider The Hour Glass Limited (SGX:AGS) as an attractive investment with its 6.5x 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 limited.

The earnings growth achieved at Hour Glass over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Hour Glass

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SGX:AGS Price Based on Past Earnings September 1st 2020
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hour Glass' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Hour Glass would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.1% last year. Pleasingly, EPS has also lifted 56% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.1% shows it's a great look while it lasts.

With this information, we find it very odd that Hour Glass is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader market.

What We Can Learn From Hour Glass' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Hour Glass revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Hour Glass that you should be aware of.

You might be able to find a better investment than Hour Glass. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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