What RCE Capital Berhad's (KLSE:RCECAP) P/E Is Not Telling You

With a median price-to-earnings (or "P/E") ratio of close to 17x in Malaysia, you could be forgiven for feeling indifferent about RCE Capital Berhad's (KLSE:RCECAP) P/E ratio of 15.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for RCE Capital Berhad as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for RCE Capital Berhad

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Does Growth Match The P/E?

In order to justify its P/E ratio, RCE Capital Berhad would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 8.1%. The latest three year period has also seen a 12% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 4.1% over the next year. With the market predicted to deliver 17% growth , the company is positioned for a weaker earnings result.

With this information, we find it interesting that RCE Capital Berhad is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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 RCE Capital Berhad's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for RCE Capital Berhad (of which 1 is potentially serious!) you should know about.

If these risks are making you reconsider your opinion on RCE 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.