There wouldn't be many who think SD Guthrie Berhad's (KLSE:SDG) price-to-earnings (or "P/E") ratio of 14.5x is worth a mention when the median P/E in Malaysia is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been advantageous for SD Guthrie Berhad as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for SD Guthrie Berhad
Is There Some Growth For SD Guthrie Berhad?
There's an inherent assumption that a company should be matching the market for P/E ratios like SD Guthrie Berhad's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 4.0% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 8.2% per year as estimated by the analysts watching the company. With the market predicted to deliver 9.5% growth per annum, that's a disappointing outcome.
With this information, we find it concerning that SD Guthrie Berhad is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Bottom Line On SD Guthrie 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.
Our examination of SD Guthrie Berhad's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for SD Guthrie Berhad (1 doesn't sit too well with us!) that you need to take into consideration.
You might be able to find a better investment than SD Guthrie 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.