Despite an already strong run, PeterLabs Holdings Berhad (KLSE:PLABS) shares have been powering on, with a gain of 53% in the last thirty days. The last 30 days bring the annual gain to a very sharp 65%.
After such a large jump in price, PeterLabs Holdings Berhad's price-to-earnings (or "P/E") ratio of 31.9x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 14x and even P/E's below 8x 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 lofty.
As an illustration, earnings have deteriorated at PeterLabs Holdings Berhad over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
See our latest analysis for PeterLabs Holdings Berhad
Is There Enough Growth For PeterLabs Holdings Berhad?
The only time you'd be truly comfortable seeing a P/E as steep as PeterLabs Holdings Berhad's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. The last three years don't look nice either as the company has shrunk EPS by 48% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 16% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that PeterLabs Holdings Berhad is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
The strong share price surge has got PeterLabs Holdings Berhad's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of PeterLabs Holdings Berhad revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 3 warning signs for PeterLabs Holdings Berhad (1 can't be ignored!) that you should be aware of.
If these risks are making you reconsider your opinion on PeterLabs 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.