With a price-to-earnings (or “P/E”) ratio of 13.5x Precision Tsugami (China) Corporation Limited (HKG:1651) may be sending 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. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Precision Tsugami (China) could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
View our latest analysis for Precision Tsugami (China)
How Is Precision Tsugami (China)’s Growth Trending?
The only time you’d be truly comfortable seeing a P/E as high as Precision Tsugami (China)’s is when the company’s growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 58% decrease to the company’s bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 8.9% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the four analysts watching the company. That’s shaping up to be materially higher than the 15% each year growth forecast for the broader market.
With this information, we can see why Precision Tsugami (China) is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Precision Tsugami (China)’s P/E
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 Precision Tsugami (China) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 2 warning signs for Precision Tsugami (China) that we have uncovered.
Of course, you might also be able to find a better stock than Precision Tsugami (China). So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
Promoted
If you decide to trade Precision Tsugami (China), use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all 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.