Investors Aren't Buying MKH Oil Palm (East Kalimantan) Berhad's (KLSE:MKHOP) Earnings

MKH Oil Palm (East Kalimantan) Berhad's (KLSE:MKHOP) price-to-earnings (or "P/E") ratio of 11.6x 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 16x and even P/E's above 28x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

MKH Oil Palm (East Kalimantan) Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

See our latest analysis for MKH Oil Palm (East Kalimantan) 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 MKH Oil Palm (East Kalimantan) Berhad's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

MKH Oil Palm (East Kalimantan) Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 80% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 61% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 17% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that MKH Oil Palm (East Kalimantan) Berhad's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On MKH Oil Palm (East Kalimantan) Berhad's P/E

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.

As we suspected, our examination of MKH Oil Palm (East Kalimantan) Berhad revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for MKH Oil Palm (East Kalimantan) Berhad with six simple checks will allow you to discover any risks that could be an issue.

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.