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Maxis Berhad's (KLSE:MAXIS) price-to-earnings (or "P/E") ratio of 24.5x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 13x and even P/E's below 7x 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 so lofty.
While the market has experienced earnings growth lately, Maxis Berhad's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Maxis Berhad
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Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Maxis Berhad's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 8.0% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 14% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% each year, which is noticeably less attractive.
In light of this, it's understandable that Maxis Berhad's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Maxis Berhad's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Maxis Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 2 warning signs for Maxis Berhad (1 is significant!) that you should be aware of.
If these risks are making you reconsider your opinion on Maxis Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.