Nasdaq
华尔街日报Some Shareholders Feeling Restless Over Malayan Cement Berhad's (KLSE:MCEMENT) P/E Ratio
It's not a stretch to say that Malayan Cement Berhad's (KLSE:MCEMENT) price-to-earnings (or "P/E") ratio of 13x right now seems quite "middle-of-the-road" compared to the market in Malaysia, where the median P/E ratio is around 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings growth that's superior to most other companies of late, Malayan Cement Berhad has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for Malayan Cement Berhad
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Malayan Cement Berhad's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 52%. The latest three year period has also seen an excellent 544% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 3.2% per annum over the next three years. That's shaping up to be materially lower than the 17% per annum growth forecast for the broader market.
With this information, we find it interesting that Malayan Cement Berhad is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
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 Malayan Cement Berhad currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Malayan Cement Berhad with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than Malayan Cement Berhad. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.