Some Shareholders Feeling Restless Over Ecoscience International Berhad's (KLSE:EIB) P/E Ratio

Ecoscience International Berhad's (KLSE:EIB) price-to-earnings (or "P/E") ratio of 17.7x might make it look like a sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Recent earnings growth for Ecoscience International Berhad has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out the opportunities and risks within the MY Construction industry.

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

Is There Enough Growth For Ecoscience International Berhad?

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

If we review the last year of earnings growth, the company posted a terrific increase of 24%. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings growth is heading into negative territory, declining 0.3% per annum over the next three years. That's not great when the rest of the market is expected to grow by 12% per year.

With this information, we find it concerning that Ecoscience International 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 very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Ecoscience International Berhad's P/E

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.

We've established that Ecoscience International Berhad currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ecoscience International Berhad (1 is concerning) you should be aware of.

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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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.