When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 12x, you may consider XMH Holdings Ltd. (SGX:BQF) as a highly attractive investment with its 3.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, XMH Holdings has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

pe-multiple-vs-industry

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like XMH Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 216% last year. Pleasingly, EPS has also lifted 1,225% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 7.5% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that XMH Holdings is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

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 XMH Holdings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.