Why Investors Shouldn't Be Surprised By Northeast Group Berhad's (KLSE:NE) 38% Share Price Surge

Despite an already strong run, Northeast Group Berhad (KLSE:NE) shares have been powering on, with a gain of 38% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, Northeast Group Berhad may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 30.2x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Northeast Group Berhad could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Northeast Group Berhad

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

Is There Enough Growth For Northeast Group Berhad?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.0%. The last three years don't look nice either as the company has shrunk EPS by 31% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 410% per annum over the next three years. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

With this information, we can see why Northeast Group Berhad is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Northeast Group Berhad's P/E?

The strong share price surge has got Northeast Group 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 Northeast Group Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Northeast Group Berhad.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.