When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider Tong Herr Resources Berhad (KLSE:TONGHER) as a highly attractive investment with its 5.2x 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.
With earnings growth that's exceedingly strong of late, Tong Herr Resources Berhad has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Tong Herr Resources Berhad
Although there are no analyst estimates available for Tong Herr Resources Berhad, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
Tong Herr Resources Berhad's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Retrospectively, the last year delivered an exceptional 120% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 144% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Tong Herr Resources Berhad is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
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.
Our examination of Tong Herr Resources Berhad revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.