With a median price-to-earnings (or "P/E") ratio of close to 10x in Singapore, you could be forgiven for feeling indifferent about Stamford Tyres Corporation Limited's (SGX:S29) P/E ratio of 8.2x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Stamford Tyres certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.

See our latest analysis for Stamford Tyres

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Stamford Tyres will help you shine a light on its historical performance.

Is There Some Growth For Stamford Tyres?

There's an inherent assumption that a company should be matching the market for P/E ratios like Stamford Tyres' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 277% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

In contrast to the company, the rest of the market is expected to decline by 2.9% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it odd that Stamford Tyres is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Stamford Tyres revealed its growing earnings over the medium-term aren't contributing to its P/E as much as we would have predicted, given the market is set to shrink. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. It appears some are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

Having said that, be aware Stamford Tyres is showing 4 warning signs in our investment analysis, and 2 of those are potentially serious.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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