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Koh Brothers Eco Engineering Limited's (Catalist:5HV) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 47.9x Koh Brothers Eco Engineering Limited (Catalist:5HV) may be sending very bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 10x and even P/E's lower than 5x 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.

For example, consider that Koh Brothers Eco Engineering's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Koh Brothers Eco Engineering

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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 Koh Brothers Eco Engineering's earnings, revenue and cash flow.

How Is Koh Brothers Eco Engineering's Growth Trending?

In order to justify its P/E ratio, Koh Brothers Eco Engineering would need to produce outstanding growth well in excess of the market.

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Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 79% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 0.2% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Koh Brothers Eco Engineering's P/E sits above the majority of other companies. 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.

What We Can Learn From Koh Brothers Eco Engineering's P/E?

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.

We've established that Koh Brothers Eco Engineering 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Koh Brothers Eco Engineering (at least 1 which is significant), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Koh Brothers Eco Engineering, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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