Tri-Mode System (M) Berhad's (KLSE:TRIMODE) Shares Climb 29% But Its Business Is Yet to Catch Up

Tri-Mode System (M) Berhad (KLSE:TRIMODE) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Following the firm bounce in price, given close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 14x, you may consider Tri-Mode System (M) Berhad as a stock to avoid entirely with its 27.3x P/E ratio. 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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For instance, Tri-Mode System (M) Berhad's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Tri-Mode System (M) Berhad

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Tri-Mode System (M) Berhad will help you shine a light on its historical performance.

Is There Enough Growth For Tri-Mode System (M) Berhad?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Tri-Mode System (M) Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 87% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's an unpleasant look.

In light of this, it's alarming that Tri-Mode System (M) Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Tri-Mode System (M) Berhad's P/E?

Shares in Tri-Mode System (M) Berhad have built up some good momentum lately, which has really inflated its 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.

We've established that Tri-Mode System (M) Berhad currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Tri-Mode System (M) Berhad (of which 4 don't sit too well with us!) you should know about.

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.