With a price-to-earnings (or "P/E") ratio of 20.4x T7 Global Berhad (KLSE:T7GLOBAL) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

T7 Global Berhad has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for T7 Global Berhad

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Does Growth Match The High P/E?

In order to justify its P/E ratio, T7 Global Berhad would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 6.9% gain to the company's bottom line. The latest three year period has also seen an excellent 92% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why T7 Global Berhad is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On T7 Global Berhad's P/E

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 T7 Global Berhad maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for T7 Global Berhad (2 are potentially serious!) that you need to take into consideration.