Stock Analysis

Melewar Industrial Group Berhad (KLSE:MELEWAR) Held Back By Insufficient Growth Even After Shares Climb 30%

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Melewar Industrial Group Berhad (KLSE:MELEWAR) shareholders have had their patience rewarded with a 30% share price jump in the last month. The annual gain comes to 167% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Melewar Industrial Group Berhad's price-to-earnings (or "P/E") ratio of 8.5x might still make it look like a strong buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 22x and even P/E's above 41x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

For example, consider that Melewar Industrial Group Berhad's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

View our latest analysis for Melewar Industrial Group Berhad

KLSE:MELEWAR Price Based on Past Earnings May 2nd 2021
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Melewar Industrial Group Berhad will help you shine a light on its historical performance.

Is There Any Growth For Melewar Industrial Group Berhad?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Melewar Industrial Group Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. 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 35% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Melewar Industrial Group Berhad is trading at a P/E lower than the market. 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

Shares in Melewar Industrial Group Berhad are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Melewar Industrial Group Berhad maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Melewar Industrial Group Berhad is showing 3 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Melewar Industrial Group Berhad. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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