Why Investors Shouldn't Be Surprised By Reservoir Link Energy Bhd's (KLSE:RL) P/E

With a price-to-earnings (or "P/E") ratio of 72.1x Reservoir Link Energy Bhd (KLSE:RL) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 17x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Reservoir Link Energy Bhd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Reservoir Link Energy Bhd

Want the full picture on analyst estimates for the company? Then our free report on Reservoir Link Energy Bhd will help you uncover what's on the horizon.

Is There Enough Growth For Reservoir Link Energy Bhd?

The only time you'd be truly comfortable seeing a P/E as steep as Reservoir Link Energy Bhd's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. This means it has also seen a slide in earnings over the longer-term as EPS is down 88% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 413% as estimated by the two analysts watching the company. With the market only predicted to deliver 17%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Reservoir Link Energy Bhd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Reservoir Link Energy Bhd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Reservoir Link Energy Bhd (of which 2 shouldn't be ignored!) you should know about.

You might be able to find a better investment than Reservoir Link Energy Bhd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.