Carlsberg Brewery Malaysia Berhad's (KLSE:CARLSBG) price-to-earnings (or "P/E") ratio of 21.5x might make it look like a strong sell right now compared to the market in Malaysia, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Carlsberg Brewery Malaysia Berhad certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Carlsberg Brewery Malaysia Berhad
Keen to find out how analysts think Carlsberg Brewery Malaysia Berhad's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Carlsberg Brewery Malaysia Berhad's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Carlsberg Brewery Malaysia Berhad's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 96%. EPS has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.3% over the next year. That's shaping up to be similar to the 8.7% growth forecast for the broader market.
In light of this, it's curious that Carlsberg Brewery Malaysia Berhad's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Bottom Line On Carlsberg Brewery Malaysia 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 Carlsberg Brewery Malaysia Berhad currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Carlsberg Brewery Malaysia Berhad that you should be aware of.
You might be able to find a better investment than Carlsberg Brewery Malaysia Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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