Lacklustre Performance Is Driving Hong Leong Capital Berhad's (KLSE:HLCAP) Low P/E

With a price-to-earnings (or "P/E") ratio of 12.5x Hong Leong Capital Berhad (KLSE:HLCAP) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 19x and even P/E's higher than 32x are not unusual. 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. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Hong Leong Capital 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 Hong Leong Capital Berhad's earnings, revenue and cash flow.

How Is Hong Leong Capital Berhad's Growth Trending?

Hong Leong Capital Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. Pleasingly, EPS has also lifted 47% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 27% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Hong Leong Capital Berhad is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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.

We've established that Hong Leong Capital Berhad maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Hong Leong Capital Berhad is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Hong Leong Capital 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. 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.
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