MISC Berhad's (KLSE:MISC) Business Is Yet to Catch Up With Its Share Price

With a median price-to-earnings (or "P/E") ratio of close to 16x in Malaysia, you could be forgiven for feeling indifferent about MISC Berhad's (KLSE:MISC) P/E ratio of 16.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

MISC Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

Check out our latest analysis for MISC Berhad

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How Is MISC Berhad's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 8.1% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 12% per year growth forecast for the broader market.

In light of this, it's curious that MISC Berhad's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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 Final Word

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.

We've established that MISC Berhad currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the 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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for MISC Berhad with six simple checks.

If these risks are making you reconsider your opinion on MISC 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.