There's Reason For Concern Over Eastern & Oriental Berhad's (KLSE:E&O) Massive 27% Price Jump

Despite an already strong run, Eastern & Oriental Berhad (KLSE:E&O) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 235% in the last year.

Following the firm bounce in price, given around half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 16x, you may consider Eastern & Oriental Berhad as a stock to potentially avoid with its 19.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Eastern & Oriental Berhad could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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 Eastern & Oriental Berhad

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

Is There Enough Growth For Eastern & Oriental Berhad?

There's an inherent assumption that a company should outperform the market for P/E ratios like Eastern & Oriental Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 18% as estimated by the lone analyst watching the company. Meanwhile, the broader market is forecast to expand by 17%, which paints a poor picture.

With this information, we find it concerning that Eastern & Oriental Berhad is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Eastern & Oriental Berhad's shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Eastern & Oriental Berhad's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 4 warning signs for Eastern & Oriental Berhad (1 is potentially serious!) that you should be aware of.

If you're unsure about the strength of Eastern & Oriental 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.