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Ho Bee Land Limited's (SGX:H13) price-to-earnings (or "P/E") ratio of 4.2x 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 18x 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.
Ho Bee Land certainly has been doing a good job lately as it's been growing earnings more 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 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.
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What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Ho Bee Land would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 147% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 96% 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.
Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 33% over the next year. That's not great when the rest of the market is expected to grow by 3.4%.
With this information, we are not surprised that Ho Bee Land 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Ho Bee Land's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Ho Bee Land's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.