Subdued Growth No Barrier To Malaysian Pacific Industries Berhad (KLSE:MPI) With Shares Advancing 33%

Those holding Malaysian Pacific Industries Berhad (KLSE:MPI) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Following the firm bounce in price, Malaysian Pacific Industries Berhad may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21x, since almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 8x 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 so lofty.

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Malaysian Pacific Industries Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Malaysian Pacific Industries Berhad

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Is There Enough Growth For Malaysian Pacific Industries Berhad?

In order to justify its P/E ratio, Malaysian Pacific Industries Berhad would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 376% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 42% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 9.6% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10.0% each year, which is not materially different.

In light of this, it's curious that Malaysian Pacific Industries Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Malaysian Pacific Industries Berhad's P/E?

The strong share price surge has got Malaysian Pacific Industries Berhad's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Malaysian Pacific Industries Berhad currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Malaysian Pacific Industries Berhad with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Malaysian Pacific Industries Berhad. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.