Earnings Not Telling The Story For Alcom Group Berhad (KLSE:ALCOM) After Shares Rise 27%

By
Simply Wall St
Published
March 21, 2021
KLSE:ALCOM
Source: Shutterstock

Alcom Group Berhad (KLSE:ALCOM) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Alcom Group Berhad may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 70.5x, since almost half of all companies in Malaysia have P/E ratios under 20x and even P/E's lower than 12x 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 quite advantageous for Alcom Group Berhad as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Alcom Group Berhad

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KLSE:ALCOM Price Based on Past Earnings March 22nd 2021
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 Alcom Group Berhad's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Alcom Group Berhad's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 324% gain to the company's bottom line. Still, incredibly EPS has fallen 90% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Alcom Group Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Alcom Group Berhad's P/E

Shares in Alcom Group Berhad have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Alcom Group Berhad currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Alcom Group Berhad (2 are significant!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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This article by Simply Wall St is general in nature. 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.
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