When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider OSK Holdings Berhad (KLSE:OSK) as a highly attractive investment with its 4.9x 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.
OSK Holdings Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.
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What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like OSK Holdings Berhad's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 4.3% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be materially higher than the 8.9% each year growth forecast for the broader market.
In light of this, it's peculiar that OSK Holdings Berhad's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that OSK Holdings Berhad currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
You should always think about risks. Case in point, we've spotted 1 warning sign for OSK Holdings Berhad you should be aware of.