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Why Investors Shouldn't Be Surprised By Avi-Tech Holdings Limited's (SGX:1R6) P/E

Avi-Tech Holdings Limited's (SGX:1R6) price-to-earnings (or "P/E") ratio of 15x might make it look like a sell right now compared to the market in Singapore, where around half of the companies have P/E ratios below 10x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Avi-Tech Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Avi-Tech Holdings

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Keen to find out how analysts think Avi-Tech Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

Avi-Tech Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 9.7% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 32% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to remain buoyant, climbing by 63% during the coming year according to the sole analyst following the company. That would be an excellent outcome when the market is expected to decline by 1.1%.

With this information, we can see why Avi-Tech Holdings is trading at such a high P/E compared to the market. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader market going backwards.

What We Can Learn From Avi-Tech Holdings' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Avi-Tech Holdings maintains its high P/E on the strength of its forecast growth potentially beating a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. We still remain cautious about the company's ability to keep swimming against the current of the broader market turmoil. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

Having said that, be aware Avi-Tech Holdings is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

If you're unsure about the strength of Avi-Tech Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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