With a price-to-earnings (or "P/E") ratio of 8.8x MGB Berhad (KLSE:MGB) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 18x and even P/E's higher than 34x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings growth that's superior to most other companies of late, MGB 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for MGB Berhad
How Is MGB Berhad's Growth Trending?
In order to justify its P/E ratio, MGB Berhad would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 152% gain to the company's bottom line. Pleasingly, EPS has also lifted 94% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the two analysts following the company. With the market predicted to deliver 15% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it's understandable that MGB Berhad's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From MGB Berhad's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of MGB Berhad's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 1 warning sign for MGB Berhad you should know about.
Of course, you might also be able to find a better stock than MGB Berhad. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
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About KLSE:MGB
MGB Berhad
An investment holding company, operates as a construction and development company in Malaysia.
Flawless balance sheet and undervalued.
