When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider BP Plastics Holding Bhd (KLSE:BPPLAS) as an attractive investment with its 9.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
BP Plastics Holding Bhd could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
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How Is BP Plastics Holding Bhd's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as BP Plastics Holding Bhd's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.9% last year. Pleasingly, EPS has also lifted 99% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 0.08% per annum over the next three years. With the market predicted to deliver 8.9% growth per year, that's a disappointing outcome.
With this information, we are not surprised that BP Plastics Holding Bhd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
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.
As we suspected, our examination of BP Plastics Holding Bhd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.