The Computime Group Limited (HKG:320) share price has done very well over the last month, posting an excellent gain of 44%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.
Following the firm bounce in price, Computime Group’s price-to-earnings (or “P/E”) ratio of 33.6x 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.
Earnings have risen at a steady rate over the last year for Computime Group, which is generally not a bad outcome. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Computime Group’s Growth Trending?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Computime Group’s to be considered reasonable.
Retrospectively, the last year delivered a decent 7.3% gain to the company’s bottom line. Still, lamentably EPS has fallen 91% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it’s alarming that Computime Group’s P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company’s business prospects. There’s a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Final Word
Shares in Computime Group have built up some good momentum lately, which has really inflated its P/E. We’d say the price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We’ve established that Computime Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
We don’t want to rain on the parade too much, but we did also find 5 warning signs for Computime Group (1 is potentially serious!) that you need to be mindful of.
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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