Sunway Construction Group Berhad (KLSE:SUNCON) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Sunway Construction Group Berhad (KLSE:SUNCON) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 137% 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 Sunway Construction Group Berhad as a stock to avoid entirely with its 32.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Sunway Construction Group Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sunway Construction Group Berhad

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

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 Sunway Construction Group Berhad's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. Pleasingly, EPS has also lifted 95% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

With this information, we can see why Sunway Construction Group Berhad is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Sunway Construction Group Berhad have built up some good momentum lately, which has really inflated its P/E. 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 Sunway Construction Group Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Sunway Construction Group Berhad you should know about.

Of course, you might also be able to find a better stock than Sunway Construction 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.