Tex Cycle Technology (M) Berhad’s (KLSE:TEXCYCL) Share Price Not Quite Adding Up

With a median price-to-earnings (or "P/E") ratio of close to 13x in Malaysia, you could be forgiven for feeling indifferent about Tex Cycle Technology (M) Berhad's (KLSE:TEXCYCL) P/E ratio of 15.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Tex Cycle Technology (M) Berhad recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Tex Cycle Technology (M) 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 Tex Cycle Technology (M) Berhad's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Tex Cycle Technology (M) Berhad's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. As a result, it also grew EPS by 15% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 8.1% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Tex Cycle Technology (M) Berhad's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

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The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Tex Cycle Technology (M) Berhad revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Tex Cycle Technology (M) Berhad is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

If these risks are making you reconsider your opinion on Tex Cycle Technology (M) Berhad, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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