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

By
Simply Wall St
Published
February 11, 2020
KLSE:KAB
Source: Shutterstock

It's really great to see that even after a strong run, Kejuruteraanstera Berhad (KLSE:KAB) shares have been powering on, with a gain of 39% in the last thirty days. The 812% gain over the last year is certainly lovely to see, just like a wink and smile from your sweetheart.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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.

View our latest analysis for Kejuruteraanstera Berhad

How Does Kejuruteraanstera Berhad's P/E Ratio Compare To Its Peers?

Kejuruteraanstera Berhad's P/E of 77.00 indicates some degree of optimism towards the stock. As you can see below, Kejuruteraanstera Berhad has a much higher P/E than the average company (12.6) in the construction industry.

KLSE:KAB Price Estimation Relative to Market, February 12th 2020
KLSE:KAB Price Estimation Relative to Market, February 12th 2020

Kejuruteraanstera Berhad's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. 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 unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.

Kejuruteraanstera Berhad shrunk earnings per share by 7.8% last year. But EPS is up 9.5% over the last 5 years. And EPS is down 2.3% a year, over the last 3 years. So it would be surprising to see a high P/E.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. 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.

So What Does Kejuruteraanstera Berhad's Balance Sheet Tell Us?

Kejuruteraanstera Berhad has net debt worth just 0.2% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Kejuruteraanstera Berhad's P/E Ratio

With a P/E ratio of 77.0, Kejuruteraanstera Berhad is expected to grow earnings very strongly in the years to come. With a bit of debt, but a lack of recent growth, it's safe to say the market is expecting improved profit performance from the company, in the next few years. What is very clear is that the market has become significantly more optimistic about Kejuruteraanstera Berhad over the last month, with the P/E ratio rising from 55.4 back then to 77.0 today. 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. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Kejuruteraanstera Berhad may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.

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