Shareholders Should Be Pleased With Nestlé (Malaysia) Berhad's (KLSE:NESTLE) Price

With a price-to-earnings (or "P/E") ratio of 61.6x Nestlé (Malaysia) Berhad (KLSE:NESTLE) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Nestlé (Malaysia) Berhad's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Nestlé (Malaysia) Berhad

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

How Is Nestlé (Malaysia) Berhad's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Nestlé (Malaysia) Berhad's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 37% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 15% per annum over the next three years. With the market only predicted to deliver 12% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Nestlé (Malaysia) Berhad's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Nestlé (Malaysia) Berhad's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Nestlé (Malaysia) Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Nestlé (Malaysia) Berhad that you need to take into consideration.

You might be able to find a better investment than Nestlé (Malaysia) 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.