Earnings Working Against Malayan Cement Berhad's (KLSE:MCEMENT) Share Price

With a price-to-earnings (or "P/E") ratio of 11x Malayan Cement Berhad (KLSE:MCEMENT) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 15x and even P/E's higher than 25x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Malayan Cement Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

See our latest analysis for Malayan Cement Berhad

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How Is Malayan Cement Berhad's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Malayan Cement Berhad's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 54% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 628% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 3.8% each year over the next three years. That's shaping up to be materially lower than the 12% each year growth forecast for the broader market.

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

What We Can Learn From Malayan Cement 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.

As we suspected, our examination of Malayan Cement Berhad's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Malayan Cement Berhad with six simple checks.

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.