There's Reason For Concern Over P.I.E. Industrial Berhad's (KLSE:PIE) Massive 46% Price Jump

The P.I.E. Industrial Berhad (KLSE:PIE) share price has done very well over the last month, posting an excellent gain of 46%. The last 30 days bring the annual gain to a very sharp 35%.

After such a large jump in price, P.I.E. Industrial Berhad may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 25.7x, since almost half of all companies in Malaysia have P/E ratios under 16x and even P/E's lower than 10x 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.

Recent earnings growth for P.I.E. Industrial Berhad has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

P.I.E. Industrial Berhad's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a decent 5.3% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 62% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 16% over the next year. Meanwhile, the rest of the market is forecast to expand by 17%, which is not materially different.

With this information, we find it interesting that P.I.E. Industrial Berhad is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From P.I.E. Industrial Berhad's P/E?

Shares in P.I.E. Industrial Berhad have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that P.I.E. Industrial Berhad currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for P.I.E. Industrial Berhad that you should be aware of.

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 a strong growth track record, trading on a low P/E.

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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.