Ray Go Solar Holdings Berhad's (KLSE:RGS) Shareholders Might Be Looking For Exit

Ray Go Solar Holdings Berhad's (KLSE:RGS) price-to-earnings (or "P/E") ratio of 36.8x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Ray Go Solar Holdings Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Ray Go Solar Holdings Berhad

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

Is There Enough Growth For Ray Go Solar Holdings Berhad?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ray Go Solar Holdings Berhad's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 99% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Ray Go Solar Holdings Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Ray Go Solar Holdings 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.

We've established that Ray Go Solar Holdings Berhad currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Ray Go Solar Holdings Berhad is showing 4 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Ray Go Solar Holdings 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.