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When close to half the companies in Malaysia have price-to-earnings ratios (or "P/E's") below 13x, you may consider Yinson Holdings Berhad (KLSE:YINSON) as a stock to potentially avoid with its 16.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Yinson Holdings Berhad as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Yinson Holdings Berhad
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How Is Yinson Holdings Berhad's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Yinson Holdings Berhad's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. The latest three year period has also seen an excellent 82% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 6.3% during the coming year according to the ten analysts following the company. With the market predicted to deliver 9.2% growth , the company is positioned for a weaker earnings result.
With this information, we find it concerning that Yinson Holdings Berhad is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Yinson Holdings Berhad currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.