There's Reason For Concern Over CPE Technology Berhad's (KLSE:CPETECH) Massive 31% Price Jump

CPE Technology Berhad (KLSE:CPETECH) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

Following the firm bounce in price, given around half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider CPE Technology Berhad as a stock to potentially avoid with its 19.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Our free stock report includes 3 warning signs investors should be aware of before investing in CPE Technology Berhad. Read for free now.

The earnings growth achieved at CPE Technology Berhad over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for CPE Technology Berhad

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 CPE Technology Berhad's earnings, revenue and cash flow.

Is There Enough Growth For CPE Technology Berhad?

The only time you'd be truly comfortable seeing a P/E as high as CPE Technology Berhad's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 44% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's an unpleasant look.

In light of this, it's alarming that CPE Technology Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From CPE Technology Berhad's P/E?

CPE Technology Berhad shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that CPE Technology Berhad currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

Before you settle on your opinion, we've discovered 3 warning signs for CPE Technology Berhad (1 can't be ignored!) that you should be aware of.

You might be able to find a better investment than CPE Technology Berhad. 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.