EP Manufacturing Bhd (KLSE:EPMB) Surges 26% Yet Its Low P/E Is No Reason For Excitement

EP Manufacturing Bhd (KLSE:EPMB) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

Even after such a large jump in price, EP Manufacturing Bhd's price-to-earnings (or "P/E") ratio of 6.5x might still make it look like a strong buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 14x and even P/E's above 25x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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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. 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 out of favour.

Check out our latest analysis for EP Manufacturing Bhd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on EP Manufacturing Bhd will help you shine a light on its historical performance.

How Is EP Manufacturing Bhd's Growth Trending?

In order to justify its P/E ratio, EP Manufacturing Bhd would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.3%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that EP Manufacturing Bhd's P/E sits below the majority of other companies. 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.

The Bottom Line On EP Manufacturing Bhd's P/E

Even after such a strong price move, EP Manufacturing Bhd's P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that EP Manufacturing Bhd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for EP Manufacturing Bhd that you need to take into consideration.

You might be able to find a better investment than EP Manufacturing Bhd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (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.