Earnings Working Against Hong Leong Capital Berhad's (KLSE:HLCAP) Share Price

When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 15x, you may consider Hong Leong Capital Berhad (KLSE:HLCAP) as an attractive investment with its 9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Hong Leong Capital Berhad has been doing very well. One possibility is that the P/E is low because investors think this strong 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 Hong Leong Capital Berhad

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hong Leong Capital Berhad will help you shine a light on its historical performance.

How Is Hong Leong Capital Berhad's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 49%. Still, incredibly EPS has fallen 43% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 16% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Hong Leong Capital Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

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.

We've established that Hong Leong Capital Berhad maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. 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 moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Hong Leong Capital Berhad (1 shouldn't be ignored!) that you need to be mindful of.

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

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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.