With a median price-to-earnings (or "P/E") ratio of close to 13x in Malaysia, you could be forgiven for feeling indifferent about HPMT Holdings Berhad's (KLSE:HPMT) P/E ratio of 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
While the market has experienced earnings growth lately, HPMT Holdings Berhad's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
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Does Growth Match The P/E?
In order to justify its P/E ratio, HPMT Holdings Berhad would need to produce growth that's similar to the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 19% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the only analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 8.7%, which is noticeably less attractive.
In light of this, it's curious that HPMT Holdings Berhad's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.
The Bottom Line On HPMT Holdings Berhad's P/E
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that HPMT Holdings Berhad currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You need to take note of risks, for example - HPMT Holdings Berhad has 2 warning signs (and 1 which can't be ignored) we think you should know about.