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With a price-to-earnings (or "P/E") ratio of 17.2x Heineken Malaysia Berhad (KLSE:HEIM) may be sending bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Heineken Malaysia Berhad has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
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Is There Enough Growth For Heineken Malaysia Berhad?
The only time you'd be truly comfortable seeing a P/E as high as Heineken Malaysia Berhad's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 98%. As a result, it also grew EPS by 26% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 1.2% during the coming year according to the twelve analysts following the company. That's not great when the rest of the market is expected to grow by 12%.
In light of this, it's alarming that Heineken Malaysia Berhad's P/E sits above 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 at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
What We Can Learn From Heineken Malaysia Berhad's P/E?
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 Heineken Malaysia Berhad currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.