Subdued Growth No Barrier To Lotus KFM Berhad's (KLSE:LOTUS) Price

Lotus KFM Berhad's (KLSE:LOTUS) price-to-earnings (or "P/E") ratio of 35.3x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 18x and even P/E's below 12x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Lotus KFM Berhad over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Lotus KFM Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lotus KFM Berhad's earnings, revenue and cash flow.

Is There Enough Growth For Lotus KFM Berhad?

Lotus KFM Berhad's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 43%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 30% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Lotus KFM Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Lotus KFM Berhad's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Lotus KFM Berhad currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Lotus KFM Berhad (at least 1 which is potentially serious), and understanding these should be part of your investment process.

You might be able to find a better investment than Lotus KFM Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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