SFP Tech Holdings Berhad's (KLSE:SFPTECH) price-to-earnings (or "P/E") ratio of 65.5x 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent earnings growth for SFP Tech Holdings Berhad has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
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Does Growth Match The High P/E?
SFP Tech Holdings Berhad's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a worthy increase of 10%. Still, lamentably EPS has fallen 99% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 82% each year over the next three years. With the market predicted to deliver 8.9% growth per year, that's a disappointing outcome.
In light of this, it's alarming that SFP Tech Holdings Berhad's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
The Final Word
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 SFP Tech Holdings Berhad's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.