Getting In Cheap On Chinasoft International Limited (HKG:354) Is Unlikely

Chinasoft International Limited's (HKG:354) price-to-earnings (or "P/E") ratio of 17.4x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x and even P/E's below 5x 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.

Recent times have been advantageous for Chinasoft International as its earnings have been rising faster 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.

View our latest analysis for Chinasoft International

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chinasoft International.

Is There Enough Growth For Chinasoft International?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Chinasoft International's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 3.9%. The latest three year period has also seen an excellent 51% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is not materially different.

In light of this, it's curious that Chinasoft International's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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.

We've established that Chinasoft International currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Chinasoft International that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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This article by Simply Wall St is general in nature. 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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