Wai Hung Group Holdings Limited's (HKG:3321) Share Price Matching Investor Opinion

With a price-to-earnings (or "P/E") ratio of 37.6x Wai Hung Group Holdings Limited (HKG:3321) may be sending very 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 highly elevated P/E.

As an illustration, earnings have deteriorated at Wai Hung Group Holdings over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Wai Hung Group Holdings

Where Does Wai Hung Group Holdings' P/E Sit Within Its Industry?

We'd like to see if P/E's within Wai Hung Group Holdings' industry might provide some colour around the company's particularly high P/E ratio. The image below shows that the Commercial Services industry as a whole also has a P/E ratio higher than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Commercial Services industry's current setting, most of its constituents' P/E's would be expected to be raised up. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wai Hung Group Holdings' earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Wai Hung Group Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 6.2% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 54% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Wai Hung Group Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

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.

As we suspected, our examination of Wai Hung Group Holdings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Wai Hung Group Holdings has 2 warning signs (and 1 which is significant) we think 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.

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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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