Amway (Malaysia) Holdings Berhad's (KLSE:AMWAY) price-to-earnings (or "P/E") ratio of 15.3x might make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Amway (Malaysia) Holdings Berhad has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Amway (Malaysia) Holdings Berhad?

There's an inherent assumption that a company should outperform the market for P/E ratios like Amway (Malaysia) Holdings Berhad's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 30% during the coming year according to the three analysts following the company. With the market only predicted to deliver 8.2%, the company is positioned for a stronger earnings result.

With this information, we can see why Amway (Malaysia) Holdings Berhad is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Amway (Malaysia) Holdings Berhad's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Amway (Malaysia) Holdings Berhad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.