When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider Fima Corporation Berhad (KLSE:FIMACOR) as a highly attractive investment with its 6.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Fima Corporation Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, 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 Fima Corporation Berhad
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fima Corporation Berhad will help you shine a light on its historical performance.
How Is Fima Corporation Berhad's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Fima Corporation Berhad's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 163%. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we can see why Fima Corporation Berhad is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Fima Corporation Berhad revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Fima Corporation Berhad that you should be aware of.