Telekom Malaysia Berhad's (KLSE:TM) Business Is Trailing The Market But Its Shares Aren't

There wouldn't be many who think Telekom Malaysia Berhad's (KLSE:TM) price-to-earnings (or "P/E") ratio of 14x is worth a mention when the median P/E in Malaysia is similar at about 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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With earnings growth that's superior to most other companies of late, Telekom Malaysia Berhad has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Telekom Malaysia Berhad

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Telekom Malaysia Berhad's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. This was backed up an excellent period prior to see EPS up by 84% in total over the last three years. 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 analysts covering the company suggest earnings growth is heading into negative territory, declining 0.8% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 11% each year, which paints a poor picture.

In light of this, it's somewhat alarming that Telekom Malaysia Berhad's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

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.

We've established that Telekom Malaysia Berhad currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Telekom Malaysia Berhad (including 1 which can't be ignored).

If these risks are making you reconsider your opinion on Telekom Malaysia 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.