Pacific Radiance Ltd.'s (SGX:RXS) Share Price Boosted 28% But Its Business Prospects Need A Lift Too
Pacific Radiance Ltd. (SGX:RXS) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last month tops off a massive increase of 158% in the last year.
Even after such a large jump in price, given about half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Pacific Radiance as an attractive investment with its 7.7x 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.
While the market has experienced earnings growth lately, Pacific Radiance's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for Pacific Radiance
Does Growth Match The Low P/E?
Pacific Radiance's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 52%. The last three years don't look nice either as the company has shrunk EPS by 94% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 6.4% per annum over the next three years. With the market predicted to deliver 9.8% growth per year, that's a disappointing outcome.
In light of this, it's understandable that Pacific Radiance's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Key Takeaway
Pacific Radiance's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.
We've established that Pacific Radiance maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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 Pacific Radiance is showing 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored.
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.