Stock Analysis

Subdued Growth No Barrier To Minth Group Limited's (HKG:425) Price

SEHK:425
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Minth Group Limited's (HKG:425) price-to-earnings (or "P/E") ratio of 14.3x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x 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 lofty.

There hasn't been much to differentiate Minth Group's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Minth Group

Does Minth Group Have A Relatively High Or Low P/E For Its Industry?

We'd like to see if P/E's within Minth Group's industry might provide some colour around the company's high P/E ratio. The image below shows that the Auto Components industry as a whole has a P/E ratio similar to the market. So unfortunately this doesn't provide a lot to explain the company's ratio right now. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Auto Components industry. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.

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SEHK:425 Price Based on Past Earnings July 24th 2020
Want the full picture on analyst estimates for the company? Then our free report on Minth Group will help you uncover what's on the horizon.

Does Growth Match The High P/E?

Minth Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 4.1% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% each year over the next three years. With the market predicted to deliver 15% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Minth Group is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Minth Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Minth Group.

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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