With Farm Fresh Berhad (KLSE:FFB) It Looks Like You'll Get What You Pay For

When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider Farm Fresh Berhad (KLSE:FFB) as a stock to avoid entirely with its 50.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Farm Fresh Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

View our latest analysis for Farm Fresh Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Farm Fresh Berhad.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Farm Fresh Berhad would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 24% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 35% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 13% per annum, which is noticeably less attractive.

With this information, we can see why Farm Fresh Berhad is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more 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.

As we suspected, our examination of Farm Fresh Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Farm Fresh Berhad (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.