Is This The Most “Overvalued” Company in Singapore’s Stock Market?

I normally look for “undervalued” stocks in the market. But I wanted to try something different earlier today. I wanted to look for the most “overvalued” stock in the market.

The screening process

In the experiment, I scanned the Singapore market for all the companies with high price-to-tangible-book (PTB) and price-to-earnings (PE) ratios. My criteria for ‘high’ was a PTB ratio of over 10 and a PE of more than 40.

The result

Interestingly, only one company came out from my search: Q & M Dental Group (Singapore) Limited (SGX: QC7).

The company is the largest private dental group in Singapore and also has dentistry-related businesses in Malaysia and China.

Q & M has experienced fast growth in the past decade. Its revenue has increased from S$24.4 million in 2006 to S$124.0 million in 2015 – that’s a compound annual growth rate of 20%. Its profit has increased in similar fashion, jumping 13.6% per year from S$3.6 million in 2006 to S$11.4 million in 2015.

Unfortunately, a large chunk of Q & M’s growth had been financed with equity (the issuance of new shares). This resulted in the company’s earnings per share growing by just 5.4% per annum over the same period. It’s a respectable growth rate, but much slower compared to the company’s revenue and profit.

Right now, Q & M trades at 48 times trailing earnings and 62 times tangible book value. It also offers a 1.4% dividend yield.

Foolish Summary

Have you noticed that prior to this paragraph, I have added quotation marks whenever I mentioned the terms “undervalued” and “overvalued,” even in the title? This is because many investors tend to think of undervalued stocks as having low PE and PTB ratios. The same goes for overvalued stocks; many investors think the category is made out of stocks with high PE and/or PTB ratios.

However, it is not always the case. Some stocks with high valuation ratios might actually be reasonably priced in relation to their huge growth potential while a stock with a low valuation that is going to be bankrupt soon could actually still be really expensive.

Just because Q & M is trading at high valuations does not mean it is necessarily overvalued. At the end of the day, as investors, we have to ask ourselves, Is a company’s valuation justified given its past record and its future growth potential?

So, is Q & M actually overvalued? That is something for you to answer.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Stanley Lim doesn’t own shares in any companies mentioned.