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With a price-to-earnings (or "P/E") ratio of 18.7x Westports Holdings Berhad (KLSE:WPRTS) may be sending bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.
Westports Holdings Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Westports Holdings Berhad would need to produce impressive growth in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.2%. Regardless, EPS has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 2.4% over the next year. That's not great when the rest of the market is expected to grow by 8.7%.
With this information, we find it concerning that Westports Holdings Berhad is trading at a P/E higher than the market. 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.
What We Can Learn From Westports Holdings 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.
We've established that Westports Holdings Berhad currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. 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.