Earnings Tell The Story For YTL Power International Berhad (KLSE:YTLPOWR)

YTL Power International Berhad's (KLSE:YTLPOWR) price-to-earnings (or "P/E") ratio of 33.7x 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 19x and even P/E's below 12x 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.

Recent times haven't been advantageous for YTL Power International Berhad as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for YTL Power International Berhad

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Does Growth Match The High P/E?

In order to justify its P/E ratio, YTL Power International 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 61%. This means it has also seen a slide in earnings over the longer-term as EPS is down 75% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 147% during the coming year according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 34%, which is noticeably less attractive.

In light of this, it's understandable that YTL Power International Berhad's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From YTL Power International Berhad's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of YTL Power International Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware YTL Power International Berhad is showing 3 warning signs in our investment analysis, and 1 of those is significant.

If these risks are making you reconsider your opinion on YTL Power International Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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