There wouldn't be many who think Lysaght Galvanized Steel Berhad's (KLSE:LYSAGHT) price-to-earnings (or "P/E") ratio of 12.8x is worth a mention when the median P/E in Malaysia is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings growth that's exceedingly strong of late, Lysaght Galvanized Steel Berhad has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for Lysaght Galvanized Steel Berhad
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lysaght Galvanized Steel Berhad's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Lysaght Galvanized Steel Berhad's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 87%. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 13% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Lysaght Galvanized Steel Berhad is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Bottom Line On Lysaght Galvanized Steel 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.
We've established that Lysaght Galvanized Steel Berhad currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.