Lim Seong Hai Capital Berhad (KLSE:LSH) Shares Fly 28% But Investors Aren't Buying For Growth

Lim Seong Hai Capital Berhad (KLSE:LSH) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

In spite of the firm bounce in price, Lim Seong Hai Capital Berhad may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.6x, since almost half of all companies in Malaysia have P/E ratios greater than 14x and even P/E's higher than 26x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Lim Seong Hai Capital Berhad has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Lim Seong Hai Capital Berhad

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Lim Seong Hai Capital Berhad will help you shine a light on its historical performance.

How Is Lim Seong Hai Capital Berhad's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Lim Seong Hai Capital Berhad's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 395%. However, this wasn't enough as the latest three year period has seen a very unpleasant 98% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 10% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Lim Seong Hai Capital Berhad is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Lim Seong Hai Capital Berhad's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Lim Seong Hai Capital Berhad revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - Lim Seong Hai Capital Berhad has 3 warning signs (and 1 which is potentially serious) we think you should know about.

You might be able to find a better investment than Lim Seong Hai Capital Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.