Some Confidence Is Lacking In Tenaga Nasional Berhad's (KLSE:TENAGA) P/E

There wouldn't be many who think Tenaga Nasional Berhad's (KLSE:TENAGA) price-to-earnings (or "P/E") ratio of 16.2x is worth a mention when the median P/E in Malaysia is similar at about 15x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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With earnings growth that's superior to most other companies of late, Tenaga Nasional Berhad has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Tenaga Nasional Berhad

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How Is Tenaga Nasional Berhad's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Tenaga Nasional Berhad's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 2.8% per year over the next three years. With the market predicted to deliver 12% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Tenaga Nasional Berhad is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

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 Tenaga Nasional Berhad currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more 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 2 warning signs for Tenaga Nasional Berhad (1 is potentially serious!) that you need to be mindful of.

You might be able to find a better investment than Tenaga Nasional 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.