There's Reason For Concern Over Sime Darby Property Berhad's (KLSE:SIMEPROP) Massive 26% Price Jump

Despite an already strong run, Sime Darby Property Berhad (KLSE:SIMEPROP) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 177% in the last year.

After such a large jump in price, Sime Darby Property Berhad may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.4x, since almost half of all companies in Malaysia have P/E ratios under 18x and even P/E's lower than 10x 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 as high as it is.

With earnings growth that's superior to most other companies of late, Sime Darby Property Berhad has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sime Darby Property Berhad

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sime Darby Property Berhad.

Is There Enough Growth For Sime Darby Property Berhad?

The only time you'd be truly comfortable seeing a P/E as high as Sime Darby Property Berhad's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 2.5% each year as estimated by the analysts watching the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Sime Darby Property 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Sime Darby Property Berhad's P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Sime Darby Property 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Sime Darby Property Berhad you should be aware of.

You might be able to find a better investment than Sime Darby Property 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.

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