Luster Industries Bhd's (KLSE:LUSTER) 35% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Luster Industries Bhd (KLSE:LUSTER) shares have been powering on, with a gain of 35% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Luster Industries Bhd's price-to-earnings (or "P/E") ratio of 32.9x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Luster Industries Bhd has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Luster Industries Bhd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Luster Industries Bhd will help you shine a light on its historical performance.

Is There Enough Growth For Luster Industries Bhd?

Luster Industries Bhd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 65%. Still, incredibly EPS has fallen 46% in total from three years ago, which is quite disappointing. 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 8.1% 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 Luster Industries Bhd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Luster Industries Bhd's P/E

Luster Industries Bhd's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Luster Industries Bhd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Luster Industries Bhd that you should be aware of.

If you're unsure about the strength of Luster Industries Bhd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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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