With a price-to-earnings (or "P/E") ratio of 17.2x Heineken Malaysia Berhad (KLSE:HEIM) may be sending bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Heineken Malaysia Berhad has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Keen to find out how analysts think Heineken Malaysia Berhad's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Growth For Heineken Malaysia Berhad?
The only time you'd be truly comfortable seeing a P/E as high as Heineken Malaysia Berhad's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a terrific increase of 98%. As a result, it also grew EPS by 26% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 1.2% during the coming year according to the twelve analysts following the company. That's not great when the rest of the market is expected to grow by 12%.
In light of this, it's alarming that Heineken Malaysia Berhad's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. 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 Heineken Malaysia 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 Heineken Malaysia Berhad currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Heineken Malaysia Berhad that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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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