When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider Southern Acids (M) Berhad (KLSE:SAB) as a highly attractive investment with its 5.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Southern Acids (M) Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Southern Acids (M) Berhad
Although there are no analyst estimates available for Southern Acids (M) Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Southern Acids (M) Berhad's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Southern Acids (M) Berhad's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 96%. Pleasingly, EPS has also lifted 342% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Southern Acids (M) Berhad's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Southern Acids (M) Berhad currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.