Malayan Cement Berhad's (KLSE:MCEMENT) Popularity With Investors Is Under Threat From Overpricing

It's not a stretch to say that Malayan Cement Berhad's (KLSE:MCEMENT) price-to-earnings (or "P/E") ratio of 19.1x right now seems quite "middle-of-the-road" compared to the market in Malaysia, where the median P/E ratio is around 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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 moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Malayan Cement Berhad

Keen to find out how analysts think Malayan Cement Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Malayan Cement Berhad's Growth Trending?

The only time you'd be comfortable seeing a P/E like Malayan Cement Berhad's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 250% gain to the company's bottom line. Pleasingly, EPS has also lifted 3,401% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 7.1% over the next year. Meanwhile, the rest of the market is forecast to expand by 18%, which is noticeably more attractive.

In light of this, it's curious that Malayan Cement Berhad's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that Malayan Cement Berhad currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Malayan Cement Berhad with six simple checks on some of these key factors.

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.

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