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With a price-to-earnings (or "P/E") ratio of 20.4x Yamada Green Resources Limited (SGX:BJV) may be sending very bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, Yamada Green Resources has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Yamada Green Resources
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 Yamada Green Resources' earnings, revenue and cash flow.
Is There Enough Growth For Yamada Green Resources?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Yamada Green Resources' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 115% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 18% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 8.5% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that Yamada Green Resources is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Yamada Green Resources' P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Yamada Green Resources currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.