When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider United U-LI Corporation Berhad (KLSE:ULICORP) as a highly attractive investment with its 6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
United U-LI Corporation Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.
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Is There Any Growth For United U-LI Corporation Berhad?
There's an inherent assumption that a company should far underperform the market for P/E ratios like United U-LI Corporation Berhad's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 34% over the next year. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.
With this information, we are not surprised that United U-LI Corporation Berhad is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
What We Can Learn From United U-LI Corporation 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.
As we suspected, our examination of United U-LI Corporation Berhad's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.