It's not a stretch to say that Straits Energy Resources Berhad's (KLSE:STRAITS) price-to-earnings (or "P/E") ratio of 13.9x right now seems quite "middle-of-the-road" compared to the market in Malaysia, where the median P/E ratio is around 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's exceedingly strong of late, Straits Energy Resources Berhad has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.
Check out our latest analysis for Straits Energy Resources Berhad
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Straits Energy Resources Berhad's earnings, revenue and cash flow.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Straits Energy Resources Berhad's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 110% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 20% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 13% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Straits Energy Resources Berhad is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
What We Can Learn From Straits Energy Resources Berhad's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Straits Energy Resources Berhad revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.