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With a price-to-earnings (or "P/E") ratio of 22x Malaysian Resources Corporation Berhad (KLSE:MRCB) may be sending very bearish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios under 13x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Malaysian Resources Corporation Berhad as its earnings have been rising faster than most other companies. 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.
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Is There Enough Growth For Malaysian Resources Corporation Berhad?
In order to justify its P/E ratio, Malaysian Resources Corporation Berhad would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 308% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 169% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.8% each year, which is noticeably less attractive.
In light of this, it's understandable that Malaysian Resources Corporation Berhad's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Malaysian Resources Corporation Berhad's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Malaysian Resources Corporation Berhad maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.