Yahoo Finance Ajinomoto (Malaysia) Berhad's (KLSE:AJI) Price Is Out Of Tune With Earnings
When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider Ajinomoto (Malaysia) Berhad (KLSE:AJI) as a stock to avoid entirely with its 32.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings growth that's exceedingly strong of late, Ajinomoto (Malaysia) Berhad has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Ajinomoto (Malaysia) Berhad
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Ajinomoto (Malaysia) Berhad's earnings, revenue and cash flow.
Is There Enough Growth For Ajinomoto (Malaysia) Berhad?
The only time you'd be truly comfortable seeing a P/E as steep as Ajinomoto (Malaysia) Berhad's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 54% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 9.7% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Ajinomoto (Malaysia) Berhad is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Ajinomoto (Malaysia) 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.
Our examination of Ajinomoto (Malaysia) Berhad revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Ajinomoto (Malaysia) Berhad that you need to be mindful of.
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 low P/E).
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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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