Optimistic Investors Push Ranhill Utilities Berhad (KLSE:RANHILL) Shares Up 33% But Growth Is Lacking

Ranhill Utilities Berhad (KLSE:RANHILL) shares have had a really impressive month, gaining 33% after a shaky period beforehand. The last month tops off a massive increase of 134% in the last year.

After such a large jump in price, Ranhill Utilities Berhad's price-to-earnings (or "P/E") ratio of 30.7x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 16x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Ranhill Utilities Berhad could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ranhill Utilities Berhad

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

How Is Ranhill Utilities Berhad's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ranhill Utilities Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 4.8% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Ranhill Utilities Berhad's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Ranhill Utilities Berhad's P/E is flying high just like its stock has during the last month. 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 Ranhill Utilities Berhad currently trades on a much 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Ranhill Utilities Berhad (including 1 which is concerning).

You might be able to find a better investment than Ranhill Utilities 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).

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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.