Pentamaster Corporation Berhad's (KLSE:PENTA) 25% Cheaper Price Remains In Tune With Earnings

To the annoyance of some shareholders, Pentamaster Corporation Berhad (KLSE:PENTA) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 36% in that time.

Although its price has dipped substantially, Pentamaster Corporation Berhad may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 30.3x, since almost half of all companies in Malaysia have P/E ratios under 14x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Pentamaster Corporation Berhad's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Pentamaster Corporation Berhad

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Pentamaster Corporation Berhad would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. This means it has also seen a slide in earnings over the longer-term as EPS is down 10% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 22% per annum over the next three years. That's shaping up to be materially higher than the 9.5% per year growth forecast for the broader market.

In light of this, it's understandable that Pentamaster Corporation Berhad's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

A significant share price dive has done very little to deflate Pentamaster Corporation Berhad's very lofty P/E. 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 Pentamaster Corporation Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Pentamaster Corporation Berhad with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Pentamaster Corporation 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.