There's Reason For Concern Over VSTECS Berhad's (KLSE:VSTECS) Massive 49% Price Jump

Despite an already strong run, VSTECS Berhad (KLSE:VSTECS) shares have been powering on, with a gain of 49% in the last thirty days. The last month tops off a massive increase of 171% in the last year.

After such a large jump in price, VSTECS Berhad's price-to-earnings (or "P/E") ratio of 20x might make it look like a sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for VSTECS Berhad as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for VSTECS Berhad

Keen to find out how analysts think VSTECS Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

How Is VSTECS Berhad's Growth Trending?

In order to justify its P/E ratio, VSTECS Berhad would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.8%. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has 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 3.9% over the next year. That's shaping up to be materially lower than the 18% growth forecast for the broader market.

With this information, we find it concerning that VSTECS Berhad is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On VSTECS Berhad's P/E

The large bounce in VSTECS Berhad's shares has lifted the company's P/E to a fairly high level. 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 VSTECS Berhad's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for VSTECS Berhad (1 makes us a bit uncomfortable!) that you need to be mindful of.

If these risks are making you reconsider your opinion on VSTECS Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.