SD Guthrie Berhad's (KLSE:SDG) Shares Lagging The Market But So Is The Business

SD Guthrie Berhad's (KLSE:SDG) price-to-earnings (or "P/E") ratio of 14.6x 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 18x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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 low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for SD Guthrie Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SD Guthrie Berhad.

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

In order to justify its P/E ratio, SD Guthrie Berhad would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 8.9% gain to the company's bottom line. Pleasingly, EPS has also lifted 56% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.6% per annum as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 10% each year, which paints a poor picture.

With this information, we are not surprised that SD Guthrie Berhad is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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 SD Guthrie Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware SD Guthrie Berhad is showing 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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