With a median price-to-earnings (or "P/E") ratio of close to 13x in Malaysia, you could be forgiven for feeling indifferent about Kim Hin Joo (Malaysia) Berhad's (KLSE:KHJB) P/E ratio of 13.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Kim Hin Joo (Malaysia) Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Kim Hin Joo (Malaysia) Berhad
Although there are no analyst estimates available for Kim Hin Joo (Malaysia) Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Kim Hin Joo (Malaysia) Berhad's Growth Trending?
In order to justify its P/E ratio, Kim Hin Joo (Malaysia) Berhad would need to produce growth that's similar to the market.
Retrospectively, the last year delivered an exceptional 105% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 40% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 8.7% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Kim Hin Joo (Malaysia) Berhad is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Kim Hin Joo (Malaysia) Berhad currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.