With a price-to-earnings (or “P/E”) ratio of 24.4x Computime Group Limited (HKG:320) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E’s lower than 5x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.
The recent earnings growth at Computime Group would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Computime Group
Is There Enough Growth For Computime Group?
The only time you’d be truly comfortable seeing a P/E as steep as Computime Group’s is when the company’s growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 7.3%. Still, lamentably EPS has fallen 91% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 13% shows it’s an unpleasant look.
In light of this, it’s alarming that Computime Group’s P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Final Word
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 Computime Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
You need to take note of risks, for example – Computime Group has 4 warning signs (and 1 which doesn’t sit too well with us) we think you should know about.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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