When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 10x, you may consider Wong Fong Industries Limited (Catalist:1A1) as a stock to potentially avoid with its 13.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
As an illustration, earnings have deteriorated at Wong Fong Industries over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
See our latest analysis for Wong Fong Industries
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wong Fong Industries' earnings, revenue and cash flow.
Is There Enough Growth For Wong Fong Industries?
Wong Fong Industries' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. As a result, earnings from three years ago have also fallen 22% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to decline by 2.9% over the next year, or less than the company's recent medium-term annualised earnings decline.
In light of this, it's odd that Wong Fong Industries' P/E sits above the majority of other companies. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Final Word
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.
Our examination of Wong Fong Industries revealed its sharp three-year contraction in earnings isn't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to shrink less severely. When we see below average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.