Aztech Global Ltd.'s (SGX:8AZ) price-to-earnings (or "P/E") ratio of 6.8x might make it look like a 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 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times haven't been advantageous for Aztech Global as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.
Check out our latest analysis for Aztech Global
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Does Growth Match The Low P/E?
In order to justify its P/E ratio, Aztech Global would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 15%. Pleasingly, EPS has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to remain buoyant, climbing by 4.3% during the coming year according to the four analysts following the company. Meanwhile, the broader market is forecast to contract by 1.1%, which would indicate the company is doing very well.
With this information, we find it very odd that Aztech Global is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Aztech Global's analyst forecasts revealed that its superior earnings outlook against a shaky market isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a superior earnings outlook with some actual growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader market turmoil. It appears many are indeed anticipating earnings instability, because the company's current prospects should normally provide a boost to the share price.