Batu Kawan Berhad's (KLSE:BKAWAN) 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 13x and even P/E's above 23x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen at a steady rate over the last year for Batu Kawan Berhad, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Batu Kawan Berhad

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Batu Kawan Berhad will help you shine a light on its historical performance.

How Is Batu Kawan Berhad's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Batu Kawan Berhad's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 2.9%. This was backed up an excellent period prior to see EPS up by 226% 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.

This is in contrast to the rest of the market, which is expected to grow by 9.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Batu Kawan Berhad is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Batu Kawan Berhad currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for Batu Kawan Berhad you should be aware of.