Fu Shou Yuan International Group Limited’s (HKG:1448) price-to-earnings (or “P/E”) ratio of 30.4x 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 11x and even P/E’s below 5x are quite common. 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.
With only a limited decrease in earnings compared to most other companies of late, Fu Shou Yuan International Group has been doing relatively well. It seems that many are expecting the comparatively superior earnings performance to persist, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if earnings continue to dissolve.
View our latest analysis for Fu Shou Yuan International Group
Is There Enough Growth For Fu Shou Yuan International Group?
In order to justify its P/E ratio, Fu Shou Yuan International Group would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered virtually the same number to the company’s bottom line as the year before. Regardless, EPS has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Therefore, it’s fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.
In light of this, it’s curious that Fu Shou Yuan International Group’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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Key Takeaway
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Fu Shou Yuan International Group’s analyst forecasts revealed that its market-matching earnings outlook isn’t impacting its high P/E as much as we would have predicted. 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.
And what about other risks? Every company has them, and we’ve spotted 1 warning sign for Fu Shou Yuan International Group you should know about.
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.
Promoted
If you’re looking to trade Fu Shou Yuan International Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.