There's Reason For Concern Over Nextgreen Global Berhad's (KLSE:NGGB) Massive 48% Price Jump

The Nextgreen Global Berhad (KLSE:NGGB) share price has done very well over the last month, posting an excellent gain of 48%. Notwithstanding the latest gain, the annual share price return of 10.0% isn't as impressive.

After such a large jump in price, Nextgreen Global Berhad's price-to-earnings (or "P/E") ratio of 64.3x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 13x and even P/E's below 8x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Nextgreen Global Berhad's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Nextgreen Global 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 Nextgreen Global Berhad's earnings, revenue and cash flow.

How Is Nextgreen Global Berhad's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Nextgreen Global Berhad's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 8.1%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Nextgreen Global Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Nextgreen Global Berhad's P/E?

Shares in Nextgreen Global Berhad have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Nextgreen Global 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Nextgreen Global Berhad (1 shouldn't be ignored!) that we have uncovered.

You might be able to find a better investment than Nextgreen Global Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.