With a median price-to-earnings (or "P/E") ratio of close to 13x in Malaysia, you could be forgiven for feeling indifferent about Aeon Co. (M) Bhd.'s (KLSE:AEON) P/E ratio of 12.1x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for Aeon (M) Bhd as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Check out our latest analysis for Aeon (M) Bhd
Keen to find out how analysts think Aeon (M) Bhd's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Some Growth For Aeon (M) Bhd?
There's an inherent assumption that a company should be matching the market for P/E ratios like Aeon (M) Bhd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 279% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 39% 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.
Looking ahead now, EPS is anticipated to slump, contracting by 15% during the coming year according to the eight analysts following the company. That's not great when the rest of the market is expected to grow by 8.7%.
In light of this, it's somewhat alarming that Aeon (M) Bhd's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Key Takeaway
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 Aeon (M) Bhd currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we've spotted with Aeon (M) Bhd.