Why Investors Shouldn’t Be Surprised By Innity Corporation Berhad’s (KLSE:INNITY) P/E

Innity CorporationBerhad’s (KLSE: INNITY) a price-to-earnings (or “P/E”) ratio of 16.4x might make it look like a sell-off right now relative to the Malaysian market, where about half of companies have P/E ratios below 13x and even P /E below 7x are quite common. Nonetheless, we would need to dig a little deeper to determine if there is a rational basis for the high P/E.

For example, Innity Corporation Berhad’s declining earnings of late should be food for thought. Many may expect the company to still outperform most other companies in the coming period, which has kept the P/E from crashing. If not, existing shareholders might be quite worried about the viability of the share price.

Check out our latest analysis for Innity Corporation Berhad

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Want a complete picture of company profits, revenue, and cash flow? Then our free Report on Innity Corporation Berhad will help you shed light on its historical performance.

What do the growth indicators tell us about the high P/E?

Innity Corporation Berhad’s P/E ratio would be typical of a company expected to generate solid growth and, more importantly, perform better than the market.

Looking back, last year brought a frustrating 24% drop in the company’s bottom line. Even so, EPS was admirably up 69% overall from three years ago, past 12 months notwithstanding. So if they would have preferred to keep the race going, shareholders would likely have appreciated the medium-term earnings growth rates.

Comparing that to the market, which is only expected to grow 13% over the next 12 months, the company’s momentum is stronger based on recent mid-term annualized results.

In light of this, it’s understandable that Innity Corporation Berhad’s P/E sits above the majority of other companies. It seems most investors expect this strong growth to continue and are willing to pay more for the stock.

The last word

As a general rule, we prefer to limit the use of the price/earnings ratio to establishing what the market thinks of the overall health of a company.

As we suspected, our review of Innity Corporation Berhad revealed that its three-year earnings trends are contributing to its high P/E, given that they look better than current market expectations. At this point, investors believe the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. If recent medium-term earnings trends continue, it is difficult to see the stock price falling sharply in the near future under these circumstances.

Before proceeding to the next step, you must know the 3 warning signs for Innity Corporation Berhad (1 makes us a little uncomfortable!) that we discovered.

You may be able to find a better investment than Innity Corporation Berhad. If you want a selection of possible candidates, check out this free list of interesting companies that trade on less than 20x P/E (but have proven they can increase earnings).

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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