Gamuda Berhad's (KLSE:GAMUDA) price-to-earnings (or "P/E") ratio of 25.2x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 15x and even P/E's below 9x 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 so lofty.
Gamuda Berhad could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
Check out our latest analysis for Gamuda Berhad
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Gamuda Berhad's to be considered reasonable.
Retrospectively, the last year delivered a decent 7.5% gain to the company's bottom line. Pleasingly, EPS has also lifted 170% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 14% per year growth forecast for the broader market.
With this information, we can see why Gamuda Berhad is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Gamuda Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 3 warning signs for Gamuda Berhad that we have uncovered.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
About KLSE:GAMUDA
Gamuda Berhad
An investment holding company, engages in the civil engineering construction business in Malaysia, Vietnam, Australia, Singapore, Taiwan, and Qatar.
Adequate balance sheet with moderate growth potential.
