Subdued Growth No Barrier To Bosideng International Holdings Limited’s (HKG:3998) Price

Bosideng International Holdings Limited’s (HKG:3998) price-to-earnings (or “P/E”) ratio of 17.5x 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 6x 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.

Bosideng International Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

See our latest analysis for Bosideng International Holdings

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SEHK:3998 Price Based on Past Earnings September 1st 2020
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Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 21%. The latest three year period has also seen an excellent 167% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 19% each year over the next three years. 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 Bosideng International Holdings’ P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Bosideng International Holdings’ P/E?

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 Bosideng International Holdings 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.

Before you take the next step, you should know about the 1 warning sign for Bosideng International Holdings that we have uncovered.

If you’re unsure about the strength of Bosideng International Holdings’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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