With a price-to-earnings (or "P/E") ratio of 7.4x Gromutual Berhad (KLSE:GMUTUAL) 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 firmly for Gromutual Berhad recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Gromutual Berhad
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Is There Any Growth For Gromutual Berhad?
There's an inherent assumption that a company should underperform the market for P/E ratios like Gromutual Berhad's to be considered reasonable.
Retrospectively, the last year delivered a decent 10.0% gain to the company's bottom line. The latest three year period has also seen an excellent 182% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's noticeably more attractive on an annualised basis.
With this information, we find it odd that Gromutual 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.
The Key Takeaway
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 Gromutual 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. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
We don't want to rain on the parade too much, but we did also find 4 warning signs for Gromutual Berhad (1 can't be ignored!) that you need to be mindful of.