Earnings Tell The Story For Guan Chong Berhad (KLSE:GCB) As Its Stock Soars 35%

Guan Chong Berhad (KLSE:GCB) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 92%.

After such a large jump in price, given around half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 15x, you may consider Guan Chong Berhad as a stock to potentially avoid with its 18.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Guan Chong Berhad has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Guan Chong Berhad

Want the full picture on analyst estimates for the company? Then our free report on Guan Chong Berhad will help you uncover what's on the horizon.

Is There Enough Growth For Guan Chong Berhad?

There's an inherent assumption that a company should outperform the market for P/E ratios like Guan Chong Berhad's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 121% gain to the company's bottom line. The latest three year period has also seen an excellent 35% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 47% over the next year. Meanwhile, the rest of the market is forecast to only expand by 17%, which is noticeably less attractive.

With this information, we can see why Guan Chong Berhad is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The large bounce in Guan Chong Berhad's shares has lifted the company's P/E to a fairly high level. 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 Guan Chong Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 2 warning signs for Guan Chong Berhad you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.