Investors Holding Back On Bermaz Auto Berhad (KLSE:BAUTO)

With a median price-to-earnings (or "P/E") ratio of close to 17x in Malaysia, you could be forgiven for feeling indifferent about Bermaz Auto Berhad's (KLSE:BAUTO) P/E ratio of 16.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Bermaz Auto Berhad has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Bermaz Auto Berhad

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Bermaz Auto Berhad's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. This means it has also seen a slide in earnings over the longer-term as EPS is down 16% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 24% per year over the next three years. With the market only predicted to deliver 9.9% each year, the company is positioned for a stronger earnings result.

In light of this, it's curious that Bermaz Auto Berhad's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Bermaz Auto Berhad's P/E

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bermaz Auto Berhad currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Bermaz Auto Berhad (1 is significant) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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This article by Simply Wall St is general in nature. 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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