Investor Optimism Abounds Nestlé (Malaysia) Berhad (KLSE:NESTLE) But Growth Is Lacking

Nestlé (Malaysia) Berhad's (KLSE:NESTLE) price-to-earnings (or "P/E") ratio of 44.2x 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 17x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Nestlé (Malaysia) Berhad as its earnings have been rising faster than most other companies. 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 Nestlé (Malaysia) Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nestlé (Malaysia) Berhad.

What Are Growth Metrics Telling Us About The High P/E?

Nestlé (Malaysia) 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.

Retrospectively, the last year delivered a decent 7.5% gain to the company's bottom line. The latest three year period has also seen a 22% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.6% per year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 8.5% per annum, which is not materially different.

With this information, we find it interesting that Nestlé (Malaysia) Berhad is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Nestlé (Malaysia) Berhad's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Nestlé (Malaysia) Berhad you should know about.

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.