What Press Metal Aluminium Holdings Berhad's (KLSE:PMETAL) P/E Is Not Telling You

With a price-to-earnings (or "P/E") ratio of 22.6x Press Metal Aluminium Holdings Berhad (KLSE:PMETAL) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Recent times have been advantageous for Press Metal Aluminium Holdings Berhad as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Press Metal Aluminium Holdings Berhad's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Press Metal Aluminium Holdings Berhad's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. The latest three year period has also seen an excellent 47% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.9% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

With this information, we find it concerning that Press Metal Aluminium Holdings Berhad is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Bottom Line On Press Metal Aluminium Holdings Berhad's P/E

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 Press Metal Aluminium Holdings Berhad currently trades on a much 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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 Press Metal Aluminium Holdings Berhad with six simple checks.

If these risks are making you reconsider your opinion on Press Metal Aluminium Holdings Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.