KPJ Healthcare Berhad's (KLSE:KPJ) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 30.5x KPJ Healthcare Berhad (KLSE:KPJ) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for KPJ Healthcare Berhad as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for KPJ Healthcare Berhad

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

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 29%. The strong recent performance means it was also able to grow EPS by 277% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 4.8% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 14% per year growth forecast for the broader market.

In light of this, it's alarming that KPJ Healthcare Berhad's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 growth outlook.

The Final Word

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.

We've established that KPJ Healthcare Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for KPJ Healthcare Berhad you should know about.

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

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

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.