Ingenieur Gudang Berhad's (KLSE:INGENIEU) Share Price Boosted 38% But Its Business Prospects Need A Lift Too

Ingenieur Gudang Berhad (KLSE:INGENIEU) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. But the last month did very little to improve the 58% share price decline over the last year.

Although its price has surged higher, Ingenieur Gudang Berhad's price-to-earnings (or "P/E") ratio of 3.3x might still make it look like a strong buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 16x and even P/E's above 27x 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 limited.

The earnings growth achieved at Ingenieur Gudang Berhad over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Ingenieur Gudang Berhad

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 Ingenieur Gudang Berhad's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Ingenieur Gudang Berhad's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 14% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's an unpleasant look.

With this information, we are not surprised that Ingenieur Gudang Berhad is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

Shares in Ingenieur Gudang Berhad are going to need a lot more upward momentum to get the company's P/E out of its slump. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Ingenieur Gudang Berhad revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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.

Before you take the next step, you should know about the 4 warning signs for Ingenieur Gudang Berhad (1 is a bit concerning!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.