The Market Doesn't Like What It Sees From Hong Leong Industries Berhad's (KLSE:HLIND) Earnings Yet

Hong Leong Industries Berhad's (KLSE:HLIND) price-to-earnings (or "P/E") ratio of 8.8x 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 24x 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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With earnings growth that's superior to most other companies of late, Hong Leong Industries Berhad has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for Hong Leong Industries Berhad

Keen to find out how analysts think Hong Leong Industries Berhad's future stacks up against the industry? In that case, our free report is a great place to start .

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Hong Leong Industries Berhad would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, 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 year should bring diminished returns, with earnings decreasing 9.0% as estimated by the lone analyst watching the company. With the market predicted to deliver 15% growth , that's a disappointing outcome.

In light of this, it's understandable that Hong Leong Industries Berhad's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Hong Leong Industries Berhad's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Hong Leong Industries Berhad is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

If these risks are making you reconsider your opinion on Hong Leong Industries 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.