Hup Seng Industries Berhad (KLSE:HUPSENG) Stock Rockets 45% As Investors Are Less Pessimistic Than Expected

The Hup Seng Industries Berhad (KLSE:HUPSENG) share price has done very well over the last month, posting an excellent gain of 45%. The last 30 days bring the annual gain to a very sharp 85%.

After such a large jump in price, Hup Seng Industries Berhad may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.8x, since almost half of all companies in Malaysia have P/E ratios under 17x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, Hup Seng Industries Berhad has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hup Seng Industries Berhad

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

How Is Hup Seng Industries Berhad's Growth Trending?

Hup Seng Industries Berhad's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 70% gain to the company's bottom line. EPS has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.7% per year during the coming three years according to the dual analysts following the company. With the market predicted to deliver 12% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Hup Seng Industries Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Hup Seng Industries Berhad's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Hup Seng Industries Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hup Seng Industries Berhad that you need to be mindful of.

You might be able to find a better investment than Hup Seng Industries Berhad. 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.