Hi-P International Limited’s (SGX:H17) price-to-earnings (or “P/E”) ratio of 10.7x might make it look like a buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 13x and even P/E’s above 24x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
Hi-P International has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn’t going to improve at all. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. Or at the very least, you’d be hoping the earnings slide doesn’t get any worse if your plan is to pick up some stock while it’s out of favour.free report on Hi-P International.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you’d be truly comfortable seeing a P/E as low as Hi-P International’s is when the company’s growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 24%. As a result, earnings from three years ago have also fallen 3.2% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 1.7% per year over the next three years. That’s shaping up to be materially lower than the 5.9% each year growth forecast for the broader market.
With this information, we can see why Hi-P International is trading at a P/E lower than the market. Apparently many shareholders weren’t comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Hi-P International’s P/E?
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.
We’ve established that Hi-P International maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.
It is also worth noting that we have found 1 warning sign for Hi-P International that you need to take into consideration.
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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