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

KPJ Healthcare Berhad's (KLSE:KPJ) price-to-earnings (or "P/E") ratio of 36.3x 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 14x and even P/E's below 9x 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.

KPJ Healthcare Berhad's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out 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.

How Is KPJ Healthcare Berhad's Growth Trending?

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 worthy increase of 7.7%. The latest three year period has also seen an excellent 406% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 12% as estimated by the analysts watching the company. With the market predicted to deliver 17% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that KPJ Healthcare Berhad is trading at a P/E higher than the market. 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.

What We Can Learn From KPJ Healthcare Berhad's P/E?

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.

Our examination of KPJ Healthcare Berhad's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with KPJ Healthcare Berhad.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.