With a price-to-earnings (or "P/E") ratio of 19.6x UEM Edgenta Berhad (KLSE:EDGENTA) may be sending 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
While the market has experienced earnings growth lately, UEM Edgenta Berhad's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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How Is UEM Edgenta Berhad's Growth Trending?
UEM Edgenta Berhad's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 36%. This means it has also seen a slide in earnings over the longer-term as EPS is down 71% 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 73% during the coming year according to the three analysts following the company. With the market only predicted to deliver 8.5%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that UEM Edgenta 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.
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.
We've established that UEM Edgenta Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for UEM Edgenta Berhad that you should be aware of.