Mestron Holdings Berhad (KLSE:MESTRON) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Mestron Holdings Berhad (KLSE:MESTRON) shares have continued their recent momentum with a 29% gain in the last month alone. The last month tops off a massive increase of 135% in the last year.

After such a large jump in price, Mestron Holdings Berhad may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34.6x, since almost half of all companies in Malaysia have P/E ratios under 18x and even P/E's lower than 12x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Mestron Holdings Berhad has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Mestron Holdings Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mestron Holdings Berhad.

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

In order to justify its P/E ratio, Mestron Holdings Berhad would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 88%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 100% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 28% over the next year. Meanwhile, the rest of the market is forecast to expand by 35%, which is noticeably more attractive.

In light of this, it's alarming that Mestron Holdings Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Mestron Holdings Berhad's P/E is flying high just like its stock has during the last month. 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 Mestron Holdings Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Mestron Holdings Berhad has 3 warning signs we think you should be aware of.

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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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