Ajiya Berhad (KLSE:AJIYA) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 140% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, Ajiya Berhad's price-to-earnings (or "P/E") ratio of 17.6x might make it look like a sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, Ajiya Berhad has been doing very well. It seems that many are expecting the strong 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.
Check out our latest analysis for Ajiya Berhad
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ajiya Berhad will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Ajiya Berhad would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 49%. The strong recent performance means it was also able to grow EPS by 324% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we can see why Ajiya 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 Final Word
The large bounce in Ajiya Berhad's shares has lifted the company's P/E to a fairly high level. 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 Ajiya Berhad revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.