UEM Edgenta Berhad's (KLSE:EDGENTA) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 19.7x UEM Edgenta Berhad (KLSE:EDGENTA) may be sending bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

UEM Edgenta Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for UEM Edgenta Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on UEM Edgenta Berhad.

How Is UEM Edgenta Berhad's Growth Trending?

In order to justify its P/E ratio, UEM Edgenta Berhad would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. Even so, admirably EPS has lifted 257% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the sole analyst following the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

With this information, we find it concerning that UEM Edgenta Berhad is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of UEM Edgenta Berhad's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for UEM Edgenta Berhad that you should be aware of.

Of course, you might also be able to find a better stock than UEM Edgenta Berhad. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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