Fajarbaru Builder Group Bhd. (KLSE:FAJAR) Held Back By Insufficient Growth Even After Shares Climb 35%

The Fajarbaru Builder Group Bhd. (KLSE:FAJAR) share price has done very well over the last month, posting an excellent gain of 35%. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

Even after such a large jump in price, given about half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 18x, you may still consider Fajarbaru Builder Group Bhd as an attractive investment with its 11.1x 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 limited.

Recent times have been quite advantageous for Fajarbaru Builder Group Bhd as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Fajarbaru Builder Group Bhd

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 Fajarbaru Builder Group Bhd's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Fajarbaru Builder Group Bhd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 180% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 46% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 17% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Fajarbaru Builder Group Bhd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Despite Fajarbaru Builder Group Bhd's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Fajarbaru Builder Group Bhd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Fajarbaru Builder Group Bhd (including 1 which shouldn't be ignored).

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

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.