With a price-to-earnings (or "P/E") ratio of 16.3x HeveaBoard Berhad (KLSE:HEVEA) 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.
Recent times have been advantageous for HeveaBoard Berhad as its earnings have been rising faster than most other companies. 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 HeveaBoard Berhad?
In order to justify its P/E ratio, HeveaBoard Berhad would need to produce impressive growth in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 445% last year. Still, incredibly EPS has fallen 12% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 21% during the coming year according to the only analyst following the company. With the market predicted to deliver 8.5% growth , that's a disappointing outcome.
In light of this, it's alarming that HeveaBoard Berhad's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very 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.
What We Can Learn From HeveaBoard Berhad's P/E?
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 HeveaBoard Berhad currently trades on a much 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 the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.