Kumpulan Perangsang Selangor Berhad's (KLSE:KPS) price-to-earnings (or "P/E") ratio of 8.1x might make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 14x and even P/E's above 23x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Kumpulan Perangsang Selangor Berhad could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for Kumpulan Perangsang Selangor Berhad
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Does Growth Match The Low P/E?
In order to justify its P/E ratio, Kumpulan Perangsang Selangor Berhad would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 29%. Even so, admirably EPS has lifted 62% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 5.8% as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 8.7%.
In light of this, it's understandable that Kumpulan Perangsang Selangor Berhad's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Kumpulan Perangsang Selangor Berhad maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.