GFM Services Berhad (KLSE:GFM) Might Not Be As Mispriced As It Looks

When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 17x, you may consider GFM Services Berhad (KLSE:GFM) as an attractive investment with its 8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at GFM Services Berhad over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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 GFM Services 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 GFM Services Berhad's earnings, revenue and cash flow.

Is There Any Growth For GFM Services Berhad?

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

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The strong recent performance means it was also able to grow EPS by 643% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 15% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that GFM Services Berhad's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

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.

Our examination of GFM Services Berhad revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 4 warning signs for GFM Services Berhad (1 is significant!) that you need to take into consideration.

Of course, you might also be able to find a better stock than GFM Services 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.