Sembcorp Industries Ltd's (SGX:U96) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 13x, you may consider Sembcorp Industries Ltd (SGX:U96) as an attractive investment with its 9.9x 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.

Sembcorp Industries certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Sembcorp Industries

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. The strong recent performance means it was also able to grow EPS by 2,403% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.2% per annum as estimated by the twelve analysts watching the company. With the market predicted to deliver 6.1% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Sembcorp Industries 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 Final Word

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.

We've established that Sembcorp Industries 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sembcorp Industries (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.