Improved Earnings Required Before Kein Hing International Berhad (KLSE:KEINHIN) Stock's 25% Jump Looks Justified

Kein Hing International Berhad (KLSE:KEINHIN) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.6% in the last twelve months.

Although its price has surged higher, Kein Hing International Berhad may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.6x, since almost half of all companies in Malaysia have P/E ratios greater than 15x and even P/E's higher than 26x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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As an illustration, earnings have deteriorated at Kein Hing International Berhad over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

View our latest analysis for Kein Hing International Berhad

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kein Hing International Berhad will help you shine a light on its historical performance.

How Is Kein Hing International Berhad's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 16% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Kein Hing International Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Kein Hing International Berhad's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Kein Hing International Berhad maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Kein Hing International Berhad that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.