Sarawak Oil Palms Berhad's (KLSE:SOP) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 7.9x Sarawak Oil Palms Berhad (KLSE:SOP) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 16x and even P/E's higher than 28x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Sarawak Oil Palms Berhad has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Sarawak Oil Palms Berhad

Keen to find out how analysts think Sarawak Oil Palms 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 Sarawak Oil Palms Berhad?

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

Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 40% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 4.1% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 15% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Sarawak Oil Palms Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of Sarawak Oil Palms Berhad's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sarawak Oil Palms Berhad (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Sarawak Oil Palms 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.