Investors Continue Waiting On Sidelines For Guan Chong Berhad (KLSE:GCB)

Guan Chong Berhad's (KLSE:GCB) price-to-earnings (or "P/E") ratio of 9.3x might make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 14x and even P/E's above 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Guan Chong Berhad as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Guan Chong Berhad

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Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 325% last year. Pleasingly, EPS has also lifted 146% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 9.5% each year during the coming three years according to the three analysts following the company. With the market predicted to deliver 9.6% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Guan Chong Berhad is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Guan Chong Berhad currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

You always need to take note of risks, for example - Guan Chong Berhad has 2 warning signs we think you should be aware of.

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.