There's No Escaping Zantat Holdings Berhad's (KLSE:ZANTAT) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 13x Zantat Holdings Berhad (KLSE:ZANTAT) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 16x and even P/E's higher than 28x 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 limited.

Zantat Holdings Berhad has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

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

Zantat Holdings Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 25%. However, this wasn't enough as the latest three year period has seen a very unpleasant 99% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 17% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Zantat Holdings Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Zantat Holdings 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 Zantat Holdings Berhad maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Zantat Holdings Berhad that you should be aware of.

If you're unsure about the strength of Zantat Holdings Berhad's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.