Reservoir Link Energy Bhd's (KLSE:RL) 27% Dip In Price Shows Sentiment Is Matching Earnings

Reservoir Link Energy Bhd (KLSE:RL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Following the heavy fall in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 19x, you may consider Reservoir Link Energy Bhd as an attractive investment with its 11.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Reservoir Link Energy Bhd has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Reservoir Link Energy Bhd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Reservoir Link Energy Bhd will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Reservoir Link Energy Bhd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 8.8% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 35% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 31% shows it's an unpleasant look.

With this information, we are not surprised that Reservoir Link Energy Bhd is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Reservoir Link Energy Bhd's P/E

Reservoir Link Energy Bhd's P/E has taken a tumble along with its share price. 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.

We've established that Reservoir Link Energy Bhd 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Reservoir Link Energy Bhd that you should be aware of.

Of course, you might also be able to find a better stock than Reservoir Link Energy Bhd. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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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