Earnings Working Against SIIC Environment Holdings Ltd.'s (SGX:BHK) Share Price

SIIC Environment Holdings Ltd.'s (SGX:BHK) price-to-earnings (or "P/E") ratio of 3.9x might make it look like a strong buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 11x and even P/E's above 19x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at SIIC Environment Holdings over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for SIIC Environment Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on SIIC Environment Holdings will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 31%. This means it has also seen a slide in earnings over the longer-term as EPS is down 20% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 12% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that SIIC Environment Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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.

As we suspected, our examination of SIIC Environment Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware SIIC Environment Holdings is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of SIIC Environment Holdings' 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.