Malayan Flour Mills Berhad (KLSE:MFLOUR) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 3.9% isn't as impressive.
Even after such a large jump in price, Malayan Flour Mills Berhad's price-to-earnings (or "P/E") ratio of 9.6x might still make it look like a buy right now compared to the market in Malaysia, where around half of the companies have P/E ratios above 13x and even P/E's above 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Malayan Flour Mills Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
See our latest analysis for Malayan Flour Mills Berhad
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How Is Malayan Flour Mills Berhad's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Malayan Flour Mills Berhad's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 48% during the coming year according to the only analyst following the company. With the market only predicted to deliver 12%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Malayan Flour Mills Berhad is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
The latest share price surge wasn't enough to lift Malayan Flour Mills Berhad's P/E close to the market median. 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 Malayan Flour Mills Berhad's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook 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 these conditions should normally provide a boost to the share price.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Malayan Flour Mills Berhad (of which 1 is potentially serious!) you should know about.
If you're unsure about the strength of Malayan Flour Mills Berhad'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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