When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider Yinson Holdings Berhad (KLSE:YINSON) as a stock to potentially avoid with its 16.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Yinson Holdings Berhad as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yinson Holdings Berhad.
How Is Yinson Holdings Berhad's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Yinson Holdings Berhad's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. The latest three year period has also seen an excellent 82% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 6.3% during the coming year according to the ten analysts following the company. With the market predicted to deliver 9.2% growth , the company is positioned for a weaker earnings result.
With this information, we find it concerning that Yinson Holdings Berhad is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Yinson Holdings Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Yinson Holdings Berhad (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.
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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