Sime Darby Berhad's (KLSE:SIME) Earnings Are Not Doing Enough For Some Investors

When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 16x, you may consider Sime Darby Berhad (KLSE:SIME) as an attractive investment with its 10.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Sime Darby Berhad certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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How Is Sime Darby Berhad's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sime Darby Berhad's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 99% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 5.1% per annum during the coming three years according to the eleven analysts following the company. That's not great when the rest of the market is expected to grow by 11% per year.

In light of this, it's understandable that Sime Darby Berhad's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Sime Darby 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 Sime Darby Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Sime Darby Berhad (1 can't be ignored!) that you should be aware of.

If you're unsure about the strength of Sime Darby 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.