When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") above 14x, you may consider Hengyuan Refining Company Berhad (KLSE:HENGYUAN) as a highly attractive investment with its 4.2x 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.

Hengyuan Refining Company Berhad certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Hengyuan Refining Company 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 Hengyuan Refining Company Berhad's earnings, revenue and cash flow.

Is There Any Growth For Hengyuan Refining Company Berhad?

In order to justify its P/E ratio, Hengyuan Refining Company Berhad would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 242% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1,805% 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 8.7% 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 Hengyuan Refining Company Berhad is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Hengyuan Refining Company Berhad's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Hengyuan Refining Company 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. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You need to take note of risks, for example - Hengyuan Refining Company Berhad has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, you might also be able to find a better stock than Hengyuan Refining Company Berhad. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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