There Is A Reason Sime Darby Berhad's (KLSE:SIME) Price Is Undemanding

When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 18x, you may consider Sime Darby Berhad (KLSE:SIME) as an attractive investment with its 11.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Sime Darby Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for Sime Darby Berhad

Keen to find out how analysts think Sime Darby Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Sime Darby Berhad?

Sime Darby Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 63% last year. The strong recent performance means it was also able to grow EPS by 42% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 1.7% per year as estimated by the analysts watching the company. With the market predicted to deliver 12% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Sime Darby Berhad is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Sime Darby Berhad's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Sime Darby Berhad's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Sime Darby Berhad.

Of course, you might also be able to find a better stock than Sime Darby 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.