Ranhill Utilities Berhad's (KLSE:RANHILL) Popularity With Investors Is Under Threat From Overpricing

Ranhill Utilities Berhad's (KLSE:RANHILL) price-to-earnings (or "P/E") ratio of 37x 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 15x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ranhill Utilities Berhad

Keen to find out how analysts think Ranhill Utilities Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Ranhill Utilities Berhad's Growth Trending?

In order to justify its P/E ratio, Ranhill Utilities Berhad would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 55%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 70% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the four analysts watching the company. That's shaping up to be similar to the 14% per year growth forecast for the broader market.

In light of this, it's curious that Ranhill Utilities Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Ranhill Utilities Berhad's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Ranhill Utilities Berhad currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Ranhill Utilities Berhad (1 is significant!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Ranhill Utilities Berhad. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.