Subdued Growth No Barrier To Theta Edge Berhad (KLSE:THETA) With Shares Advancing 27%

Despite an already strong run, Theta Edge Berhad (KLSE:THETA) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 155% in the last year.

Since its price has surged higher, given around half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 16x, you may consider Theta Edge Berhad as a stock to potentially avoid with its 20.4x P/E ratio. 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.

The earnings growth achieved at Theta Edge Berhad over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Theta Edge Berhad

Although there are no analyst estimates available for Theta Edge Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Theta Edge Berhad's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Theta Edge 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 Theta Edge Berhad's P/E

Theta Edge Berhad shares have received a push in the right direction, but its P/E is elevated too. 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 Theta Edge 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Theta Edge Berhad (1 is a bit concerning!) that we have uncovered.

If you're unsure about the strength of Theta Edge 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.