With a price-to-earnings (or "P/E") ratio of 8.6x New Hoong Fatt Holdings Berhad (KLSE:NHFATT) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 14x and even P/E's higher than 24x are not unusual. 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 New Hoong Fatt Holdings Berhad, which is generally not a bad outcome. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. 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.
Check out our latest analysis for New Hoong Fatt Holdings Berhad
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on New Hoong Fatt Holdings Berhad will help you shine a light on its historical performance.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as New Hoong Fatt Holdings Berhad's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a decent 2.6% gain to the company's bottom line. The latest three year period has also seen an excellent 59% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that New Hoong Fatt Holdings Berhad is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From New Hoong Fatt Holdings Berhad's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of New Hoong Fatt Holdings Berhad revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. 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.