Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Business And Shares Still Trailing The Market

Hap Seng Consolidated Berhad's (KLSE:HAPSENG) price-to-earnings (or "P/E") ratio of 12.7x might make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 15x and even P/E's above 26x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Hap Seng Consolidated Berhad as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Hap Seng Consolidated Berhad

Although there are no analyst estimates available for Hap Seng Consolidated Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hap Seng Consolidated Berhad's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Hap Seng Consolidated Berhad's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 49%. However, this wasn't enough as the latest three year period has seen a very unpleasant 39% drop in EPS in aggregate. 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 16% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Hap Seng Consolidated Berhad's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

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 Hap Seng Consolidated Berhad maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Hap Seng Consolidated Berhad (including 1 which is significant).

If these risks are making you reconsider your opinion on Hap Seng Consolidated Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.