Sembcorp Industries Ltd's (SGX:U96) Share Price Is Matching Sentiment Around Its Earnings

With a price-to-earnings (or "P/E") ratio of 10.9x Sembcorp Industries Ltd (SGX:U96) may be sending bullish signals at the moment, given that almost half of all companies in Singapore have P/E ratios greater than 15x and even P/E's higher than 25x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent earnings growth for Sembcorp Industries has been in line with the market. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out 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?

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

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. The latest three year period has also seen an excellent 115% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 5.6% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.4% each year, which is noticeably more attractive.

In light of this, it's understandable that Sembcorp Industries' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Sembcorp Industries' 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.

We've established that Sembcorp Industries maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sembcorp Industries (1 is a bit concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.