A Rising Share Price Has Us Looking Closely At Kejuruteraan Asastera Berhad's (KLSE:KAB) P/E Ratio

Kejuruteraanstera Berhad (KLSE:KAB) shares have continued recent momentum with a 109% gain in the last month alone. The 586% gain over the last year is certainly lovely to see, just like a wink and smile from your sweetheart.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

Check out our latest analysis for Kejuruteraanstera Berhad

Does Kejuruteraanstera Berhad Have A Relatively High Or Low P/E For Its Industry?

Kejuruteraanstera Berhad's P/E of 56.57 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (13.3) for companies in the construction industry is a lot lower than Kejuruteraanstera Berhad's P/E.

Its relatively high P/E ratio indicates that Kejuruteraanstera Berhad shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.

Kejuruteraanstera Berhad shrunk earnings per share by 7.8% last year. But it has grown its earnings per share by 9.5% per year over the last five years. And over the longer term (3 years) earnings per share have decreased 2.3% annually. So it would be surprising to see a high P/E.

Remember: P/E Ratios Don't Consider The Balance Sheet

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Kejuruteraanstera Berhad's Balance Sheet

Kejuruteraanstera Berhad has net debt worth just 0.3% of its market capitalization. So it doesn't have as many options as it would with net cash, but its debt would not have much of an impact on its P/E ratio.

The Bottom Line On Kejuruteraanstera Berhad's P/E Ratio

Kejuruteraanstera Berhad's P/E is 56.6 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become much more excited about Kejuruteraanstera Berhad recently, since they have pushed its P/E ratio from 27.1 to 56.6 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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 modest (or no) debt, trading on a P/E below 20.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.