When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Gamuda Berhad (KLSE:GAMUDA) as a stock to potentially avoid with its 20.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Gamuda Berhad's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Gamuda Berhad
Does Growth Match The High P/E?
In order to justify its P/E ratio, Gamuda Berhad would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a decent 4.5% gain to the company's bottom line. The latest three year period has also seen an excellent 205% overall rise in EPS, aided somewhat by its short-term performance. 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 13% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is not materially different.
With this information, we find it interesting that Gamuda Berhad is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Key Takeaway
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 Gamuda Berhad's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Gamuda Berhad that you should be aware of.
If you're unsure about the strength of Gamuda Berhad's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
