Earnings Not Telling The Story For Telekom Malaysia Berhad (KLSE:TM)

There wouldn't be many who think Telekom Malaysia Berhad's (KLSE:TM) price-to-earnings (or "P/E") ratio of 13.6x is worth a mention when the median P/E in Malaysia is similar at about 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been pleasing for Telekom Malaysia Berhad as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Telekom Malaysia Berhad

Want the full picture on analyst estimates for the company? Then our free report on Telekom Malaysia Berhad will help you uncover what's on the horizon.

Does Growth Match The P/E?

In order to justify its P/E ratio, Telekom Malaysia Berhad would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 122% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.1% per year as estimated by the analysts watching the company. With the market predicted to deliver 13% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Telekom Malaysia Berhad is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Telekom Malaysia Berhad's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Telekom Malaysia Berhad's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Telekom Malaysia Berhad (at least 1 which is potentially serious), and understanding these should be part of your investment process.

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).

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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.