Stella Holdings Berhad's (KLSE:STELLA) Shares Climb 29% But Its Business Is Yet to Catch Up

Stella Holdings Berhad (KLSE:STELLA) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Since its price has surged higher, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Stella Holdings Berhad as a stock to potentially avoid with its 25.5x 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 lofty.

Stella Holdings Berhad has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable 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.

See our latest analysis for Stella Holdings Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Stella Holdings Berhad's earnings, revenue and cash flow.

How Is Stella Holdings Berhad's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Stella Holdings Berhad's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.4% last year. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Stella Holdings Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Final Word

Stella Holdings Berhad shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Stella Holdings Berhad revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Stella Holdings Berhad (at least 1 which can't be ignored), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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