Why Investors Shouldn't Be Surprised By PETRONAS Chemicals Group Berhad's (KLSE:PCHEM) P/E

With a price-to-earnings (or "P/E") ratio of 48.4x PETRONAS Chemicals Group Berhad (KLSE:PCHEM) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

PETRONAS Chemicals Group Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for PETRONAS Chemicals Group Berhad

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

Is There Enough Growth For PETRONAS Chemicals Group Berhad?

The only time you'd be truly comfortable seeing a P/E as steep as PETRONAS Chemicals Group Berhad's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 63%. This means it has also seen a slide in earnings over the longer-term as EPS is down 87% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 188% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 17% growth forecast for the broader market.

With this information, we can see why PETRONAS Chemicals Group Berhad is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On PETRONAS Chemicals Group Berhad's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that PETRONAS Chemicals Group Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for PETRONAS Chemicals Group Berhad that you should be aware of.

You might be able to find a better investment than PETRONAS Chemicals Group Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.