SFP Tech Holdings Berhad (KLSE:SFPTECH) Stock Rockets 36% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, SFP Tech Holdings Berhad (KLSE:SFPTECH) shares have been powering on, with a gain of 36% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider SFP Tech Holdings Berhad as a stock to avoid entirely with its 61.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

There hasn't been much to differentiate SFP Tech Holdings Berhad's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for SFP Tech Holdings Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SFP Tech Holdings Berhad.

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

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

If we review the last year of earnings growth, the company posted a worthy increase of 10%. Still, lamentably EPS has fallen 99% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 82% each year during the coming three years according to the four analysts following the company. Meanwhile, the broader market is forecast to expand by 8.3% per year, which paints a poor picture.

In light of this, it's alarming that SFP Tech Holdings Berhad's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

The strong share price surge has got SFP Tech Holdings Berhad's P/E rushing to great heights as well. 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 SFP Tech Holdings Berhad currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware SFP Tech Holdings Berhad is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of SFP Tech Holdings Berhad's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.