The Market Doesn't Like What It Sees From Leong Hup International Berhad's (KLSE:LHI) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 6.9x Leong Hup International Berhad (KLSE:LHI) may be sending very bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 16x and even P/E's higher than 29x 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 so limited.

Leong Hup International Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Leong Hup International Berhad

Keen to find out how analysts think Leong Hup International Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Leong Hup International Berhad?

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

Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 109% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 4.0% per year over the next three years. Meanwhile, the broader market is forecast to expand by 14% per annum, which paints a poor picture.

With this information, we are not surprised that Leong Hup International Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Leong Hup International Berhad's P/E?

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 Leong Hup International Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Leong Hup International Berhad you should be aware of, and 1 of them shouldn't be ignored.

If these risks are making you reconsider your opinion on Leong Hup International Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.