There's No Escaping DRB-HICOM Berhad's (KLSE:DRBHCOM) Muted Earnings Despite A 31% Share Price Rise

DRB-HICOM Berhad (KLSE:DRBHCOM) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may still consider DRB-HICOM Berhad as an attractive investment with its 8.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, DRB-HICOM Berhad's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for DRB-HICOM Berhad

Keen to find out how analysts think DRB-HICOM Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

How Is DRB-HICOM Berhad's Growth Trending?

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

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 29%. Still, the latest three year period has seen an excellent 41% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 28% as estimated by the six analysts watching the company. With the market predicted to deliver 8.7% growth , that's a disappointing outcome.

In light of this, it's understandable that DRB-HICOM Berhad's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On DRB-HICOM Berhad's P/E

Despite DRB-HICOM Berhad's shares building up a head of steam, its P/E still lags most other companies. 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 DRB-HICOM Berhad's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware DRB-HICOM Berhad is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

You might be able to find a better investment than DRB-HICOM Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.