EP Manufacturing Bhd (KLSE:EPMB) Held Back By Insufficient Growth Even After Shares Climb 26%

EP Manufacturing Bhd (KLSE:EPMB) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Although its price has surged higher, EP Manufacturing Bhd's price-to-earnings (or "P/E") ratio of 11.4x might still make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 15x and even P/E's above 26x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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As an illustration, earnings have deteriorated at EP Manufacturing Bhd over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for EP Manufacturing Bhd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on EP Manufacturing Bhd's earnings, revenue and cash flow.

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

EP Manufacturing Bhd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why EP Manufacturing Bhd is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From EP Manufacturing Bhd's P/E?

The latest share price surge wasn't enough to lift EP Manufacturing Bhd's P/E close to the market median. 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 EP Manufacturing Bhd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for EP Manufacturing Bhd that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.