Edaran Berhad's (KLSE:EDARAN) Popularity With Investors Under Threat As Stock Sinks 33%

The Edaran Berhad (KLSE:EDARAN) share price has softened a substantial 33% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 174%.

Even after such a large drop in price, Edaran Berhad's price-to-earnings (or "P/E") ratio of 27.5x might still 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 15x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Edaran Berhad has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Edaran Berhad

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Edaran Berhad's earnings, revenue and cash flow.

Is There Enough Growth For Edaran Berhad?

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

If we review the last year of earnings growth, the company posted a terrific increase of 54%. EPS has also lifted 23% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Edaran Berhad's P/E sits above the majority of other companies. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Edaran Berhad's P/E

A significant share price dive has done very little to deflate Edaran Berhad's very lofty P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Edaran Berhad revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Edaran Berhad (1 is a bit unpleasant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.