When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 14x, you may consider Golden Agri-Resources Ltd (SGX:E5H) as an attractive investment with its 7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
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Recent times have been advantageous for Golden Agri-Resources as its earnings have been rising faster than most other companies. 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.
View our latest analysis for Golden Agri-Resources
The only time you'd be truly comfortable seeing a P/E as low as Golden Agri-Resources' is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 84%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 23% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 0.2% each year over the next three years. With the market predicted to deliver 7.1% growth per annum, the company is positioned for a weaker earnings result.
With this information, we can see why Golden Agri-Resources is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Golden Agri-Resources' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
Having said that, be aware Golden Agri-Resources is showing 2 warning signs in our investment analysis, and 1 of those is concerning.
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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