What BM GreenTech Berhad's (KLSE:BMGREEN) 26% Share Price Gain Is Not Telling You

BM GreenTech Berhad (KLSE:BMGREEN) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 191% in the last year.

Following the firm bounce in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 18x, you may consider BM GreenTech Berhad as a stock to avoid entirely with its 32.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, BM GreenTech Berhad has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for BM GreenTech Berhad

Want the full picture on analyst estimates for the company? Then our free report on BM GreenTech Berhad will help you uncover what's on the horizon.

How Is BM GreenTech Berhad's Growth Trending?

In order to justify its P/E ratio, BM GreenTech Berhad would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 139% last year. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 7.1% per year during the coming three years according to the sole analyst following the company. That's shaping up to be materially lower than the 14% each year growth forecast for the broader market.

In light of this, it's alarming that BM GreenTech Berhad's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in BM GreenTech Berhad have built up some good momentum lately, which has really inflated its P/E. 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 BM GreenTech Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for BM GreenTech Berhad that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com