With a price-to-earnings (or "P/E") ratio of 10.7x British American Tobacco (Malaysia) Berhad (KLSE:BAT) may be sending bullish signals at the moment, given that almost half of all companies in Malaysia have P/E ratios greater than 14x and even P/E's higher than 25x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

British American Tobacco (Malaysia) Berhad hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for British American Tobacco (Malaysia) Berhad

Keen to find out how analysts think British American Tobacco (Malaysia) Berhad's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For British American Tobacco (Malaysia) Berhad?

There's an inherent assumption that a company should underperform the market for P/E ratios like British American Tobacco (Malaysia) Berhad's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 4.9%. This means it has also seen a slide in earnings over the longer-term as EPS is down 25% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.0% during the coming year according to the eleven analysts following the company. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.

With this information, we can see why British American Tobacco (Malaysia) Berhad is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of British American Tobacco (Malaysia) Berhad's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for British American Tobacco (Malaysia) Berhad that you need to be mindful of.

If these risks are making you reconsider your opinion on British American Tobacco (Malaysia) 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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