Insufficient Growth At SDS Group Berhad (KLSE:SDS) Hampers Share Price

SDS Group Berhad's (KLSE:SDS) price-to-earnings (or "P/E") ratio of 12.3x 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 19x and even P/E's above 35x 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.

SDS Group Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for SDS Group Berhad

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

Is There Any Growth For SDS Group Berhad?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 344% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 1.8% as estimated by the one analyst watching the company. Meanwhile, the broader market is forecast to expand by 18%, which paints a poor picture.

In light of this, it's understandable that SDS Group Berhad's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From SDS Group Berhad's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of SDS Group Berhad's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for SDS Group Berhad you should be aware of.

If you're unsure about the strength of SDS Group Berhad's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com