Even with a 28% increase, cautious investors are not fully rewarding the performance of SP Setia Berhad (KLSE:SPSETIA)

Those who hold SP Setia Berhad (KLSE: SPSETIA) stocks would be relieved that the share price has rebounded 28% in the last thirty days, but they must continue to repair the recent damage they have caused to investors’ portfolios. But the past month has done little to improve the stock price’s 62% decline over the past year.

Despite the firm price rebound, SP Setia Berhad’s 10.3x price-to-earnings (or “P/E”) ratio could still make it look like a buy right now relative to the Malaysian market, where around half of the companies have P/E ratios above 14x and even P/E above 24x is quite common. However, the P/E may be low for a reason and requires further investigation to determine if it is warranted.

SP Setia Berhad has certainly been doing a good job lately as its profits have grown more than most other companies. One possibility is that the P/E is weak because investors believe this strong earnings performance may be less impressive going forward. If not, existing shareholders have reason to be quite optimistic about the future direction of the stock price.

See our latest analysis for SP Setia Berhad

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If you want to see what analysts predict for the future, you should check out our free SP Setia Berhad report.

What do the growth indicators tell us about the weak P/E?

In order to justify its P/E ratio, SP Setia Berhad is expected to produce slow growth that lags the market.

Looking back, last year generated an exceptional gain of 144% on the company’s bottom line. The last three-year period also saw an overall 21% increase in EPS, largely helped by its short-term performance. As a result, shareholders would likely have been satisfied with medium-term earnings growth rates.

On the outlook side, next year should generate growth of 35% according to estimates by analysts who monitor the company. This looks to be significantly higher than the 12% growth forecast for the market as a whole.

In light of this, it is odd that SP Setia Berhad’s P/E falls below the majority of other companies. It seems that most investors are not at all convinced that the company can achieve its expectations for future growth.

What can we learn from SP Setia Berhad’s P/E?

Despite the rise of SP Setia Berhad shares, its P/E still lags most other companies. While the price-to-earnings ratio shouldn’t be the determining factor in whether or not you buy a stock, it is a very capable barometer of earnings expectations.

Our review of SP Setia Berhad’s analyst forecasts revealed that its superior earnings outlook is not contributing as much to its P/E as we would have expected. When we see a strong earnings outlook with faster than market growth, we assume that potential risks are what could put significant pressure on the P/E ratio. At least the price risks seem very low, but investors seem to think that future earnings could see great volatility.

Additionally, you should also inquire about these 3 warning signs we spotted with SP Setia Berhad (including 2 significant).

If you are uncertain about the strength of SP Setia Berhad’s businesswhy not explore our interactive list of stocks with strong trading fundamentals for some other businesses you may have missed.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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Robert D. Coleman