Southern Cable Group Berhad's (KLSE:SCGBHD) Shares Bounce 25% But Its Business Still Trails The Market

Southern Cable Group Berhad (KLSE:SCGBHD) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 130% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 18x, you may still consider Southern Cable Group Berhad as an attractive investment with its 14.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Southern Cable Group 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.

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Southern Cable Group Berhad would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 125%. Pleasingly, EPS has also lifted 100% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 32% as estimated by the one analyst watching the company. With the market predicted to deliver 18% growth , that's a disappointing outcome.

With this information, we are not surprised that Southern Cable Group 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Southern Cable Group Berhad's P/E

Despite Southern Cable Group Berhad's shares building up a head of steam, its P/E still lags most other companies. 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 Southern Cable Group Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Southern Cable Group Berhad that you should be aware of.

Of course, you might also be able to find a better stock than Southern Cable Group 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.