When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider Mega First Corporation Berhad (KLSE:MFCB) as an attractive investment with its 7.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, Mega First Corporation Berhad has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.
See our latest analysis for Mega First Corporation Berhad
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Mega First Corporation Berhad would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 1.5% per year over the next three years. That's shaping up to be materially lower than the 9.5% each year growth forecast for the broader market.
In light of this, it's understandable that Mega First Corporation Berhad's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Mega First Corporation Berhad maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You always need to take note of risks, for example - Mega First Corporation Berhad has 1 warning sign we think you should be aware of.
You might be able to find a better investment than Mega First Corporation Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we're here to simplify it.
Discover if Mega First Corporation Berhad might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.