When close to half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 11x, you may consider CapitaLand Investment Limited (SGX:9CI) as a stock to avoid entirely with its 22.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

While the market has experienced earnings growth lately, CapitaLand Investment's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for CapitaLand Investment

If you'd like to see what analysts are forecasting going forward, you should check out our free report on CapitaLand Investment.

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

CapitaLand Investment's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 69% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 24% per year during the coming three years according to the twelve analysts following the company. With the market only predicted to deliver 3.2% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why CapitaLand Investment is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of CapitaLand Investment's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for CapitaLand Investment you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on CapitaLand Investment, 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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