Unfortunately for some shareholders, the KUB Malaysia Berhad (KLSE:KUB) share price has dived 42% in the last thirty days. That drop has capped off a tough year for shareholders, with the share price down 53% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
See our latest analysis for KUB Malaysia Berhad
Does KUB Malaysia Berhad Have A Relatively High Or Low P/E For Its Industry?
KUB Malaysia Berhad's P/E of 6.11 indicates relatively low sentiment towards the stock. The image below shows that KUB Malaysia Berhad has a lower P/E than the average (8.0) P/E for companies in the oil and gas industry.
KUB Malaysia Berhad's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with KUB Malaysia Berhad, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
KUB Malaysia Berhad shrunk earnings per share by 31% over the last year. But over the longer term (5 years) earnings per share have increased by 76%. And EPS is down 9.2% a year, over the last 3 years. This could justify a low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
So What Does KUB Malaysia Berhad's Balance Sheet Tell Us?
KUB Malaysia Berhad has net cash of RM42m. This is fairly high at 40% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On KUB Malaysia Berhad's P/E Ratio
KUB Malaysia Berhad trades on a P/E ratio of 6.1, which is below the MY market average of 12.3. Falling earnings per share are likely to be keeping potential buyers away, the healthy balance sheet means the company retains potential for future growth. If that occurs, the current low P/E could prove to be temporary. What can be absolutely certain is that the market has become more pessimistic about KUB Malaysia Berhad over the last month, with the P/E ratio falling from 10.4 back then to 6.1 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than KUB Malaysia Berhad. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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