Why Investors Shouldn't Be Surprised By Tex Cycle Technology (M) Berhad's (KLSE:TEXCYCL) 25% Share Price Surge

Those holding Tex Cycle Technology (M) Berhad (KLSE:TEXCYCL) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.7% over the last year.

Following the firm bounce in price, given around half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider Tex Cycle Technology (M) Berhad as a stock to potentially avoid with its 17.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Tex Cycle Technology (M) Berhad. Read for free now.

Earnings have risen at a steady rate over the last year for Tex Cycle Technology (M) Berhad, which is generally not a bad outcome. 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 Tex Cycle Technology (M) 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 Tex Cycle Technology (M) Berhad's earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Tex Cycle Technology (M) Berhad's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 3.2% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 142% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 16% 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 understandable that Tex Cycle Technology (M) Berhad's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Tex Cycle Technology (M) Berhad's P/E?

The large bounce in Tex Cycle Technology (M) Berhad's shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of Tex Cycle Technology (M) Berhad revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term 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 2 warning signs for Tex Cycle Technology (M) Berhad (of which 1 is a bit concerning!) you should know about.

Of course, you might also be able to find a better stock than Tex Cycle Technology (M) 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.