Federal International Holdings Berhad's (KLSE:FIHB) price-to-earnings (or "P/E") ratio of 7x might make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 14x and even P/E's above 25x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Federal International Holdings Berhad as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Federal International Holdings Berhad
Although there are no analyst estimates available for Federal International Holdings Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Any Growth For Federal International Holdings Berhad?
Federal International Holdings Berhad's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. The strong recent performance means it was also able to grow EPS by 34% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's understandable that Federal International Holdings Berhad's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Federal International Holdings Berhad's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Federal International Holdings Berhad maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.