There's No Escaping Zelan Berhad's (KLSE:ZELAN) Muted Earnings Despite A 38% Share Price Rise

Despite an already strong run, Zelan Berhad (KLSE:ZELAN) shares have been powering on, with a gain of 38% in the last thirty days. The annual gain comes to 175% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 18x, you may still consider Zelan Berhad as a highly attractive investment with its 3.8x 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 so limited.

With earnings growth that's exceedingly strong of late, Zelan Berhad has been doing very well. 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.

View our latest analysis for Zelan Berhad

Although there are no analyst estimates available for Zelan Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Zelan Berhad?

In order to justify its P/E ratio, Zelan Berhad would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 254% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 24% 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 understandable that Zelan Berhad's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Even after such a strong price move, Zelan Berhad's P/E still trails the rest of the market significantly. 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.

As we suspected, our examination of Zelan Berhad revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Zelan Berhad (1 is a bit unpleasant!) that you should be aware of.

If these risks are making you reconsider your opinion on Zelan Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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