Bina Darulaman Berhad's (KLSE:BDB) 30% Share Price Surge Not Quite Adding Up

Despite an already strong run, Bina Darulaman Berhad (KLSE:BDB) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 115% in the last year.

After such a large jump in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Bina Darulaman Berhad as a stock to potentially avoid with its 28.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

The earnings growth achieved at Bina Darulaman Berhad over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Bina Darulaman Berhad

Although there are no analyst estimates available for Bina Darulaman Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Bina Darulaman Berhad?

There's an inherent assumption that a company should outperform the market for P/E ratios like Bina Darulaman Berhad's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. 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 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Bina Darulaman Berhad is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

The large bounce in Bina Darulaman Berhad's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Bina Darulaman Berhad revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Bina Darulaman Berhad (of which 1 is potentially serious!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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