There's No Escaping K. Seng Seng Corporation Berhad's (KLSE:KSSC) Muted Earnings Despite A 29% Share Price Rise

K. Seng Seng Corporation Berhad (KLSE:KSSC) shares have had a really impressive month, gaining 29% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.2% in the last twelve months.

Although its price has surged higher, K. Seng Seng Corporation Berhad's price-to-earnings (or "P/E") ratio of 10.6x might still make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 14x and even P/E's above 24x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

K. Seng Seng Corporation Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Our analysis indicates that KSSC is potentially undervalued!

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on K. Seng Seng Corporation Berhad will help you shine a light on its historical performance.

How Is K. Seng Seng Corporation Berhad's Growth Trending?

K. Seng Seng Corporation Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 31%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that K. Seng Seng Corporation Berhad's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift K. Seng Seng Corporation Berhad's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of K. Seng Seng Corporation Berhad revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 3 warning signs for K. Seng Seng Corporation Berhad (2 are a bit unpleasant!) that you need to be mindful of.

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. 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.