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Little Excitement Around Raffles Education Limited's (SGX:NR7) Earnings

When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 11x, you may consider Raffles Education Limited (SGX:NR7) as an attractive investment with its 7.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, Raffles Education's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Raffles Education

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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 Raffles Education's earnings, revenue and cash flow.

Is There Any Growth For Raffles Education?

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

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Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. The last three years don't look nice either as the company has shrunk EPS by 76% 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 shrink 1.0% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised earnings results.

In light of this, it's understandable that Raffles Education's P/E sits below the majority of other companies. However, when earnings shrink rapidly P/E often shrinks too, which could set up shareholders for future disappointment regardless. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Raffles Education revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Raffles Education.

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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