With a price-to-earnings (or "P/E") ratio of 16.9x Ideal Capital Berhad (KLSE:IDEAL) may be sending bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

For example, consider that Ideal Capital Berhad's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Ideal Capital Berhad

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How Is Ideal Capital Berhad's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ideal Capital Berhad's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 20% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 8.7% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Ideal Capital Berhad's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Ideal Capital 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.

Our examination of Ideal Capital Berhad revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.