Earnings Tell The Story For TDM Berhad (KLSE:TDM) As Its Stock Soars 30%

Despite an already strong run, TDM Berhad (KLSE:TDM) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days bring the annual gain to a very sharp 97%.

Since its price has surged higher, TDM Berhad's price-to-earnings (or "P/E") ratio of 47.3x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 16x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, TDM Berhad's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for TDM Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on TDM Berhad's earnings, revenue and cash flow.

How Is TDM Berhad's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like TDM Berhad's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. Even so, admirably EPS has lifted 354% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 17% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why TDM Berhad is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

TDM Berhad's P/E is flying high just like its stock has during the last month. 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 TDM Berhad revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware TDM Berhad is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

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.