Sinotruk (Hong Kong) Limited's (HKG:3808) Business Is Trailing The Market But Its Shares Aren't

With a median price-to-earnings (or "P/E") ratio of close to 9x in Hong Kong, you could be forgiven for feeling indifferent about Sinotruk (Hong Kong) Limited's (HKG:3808) P/E ratio of 7.7x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Sinotruk (Hong Kong) has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Sinotruk (Hong Kong)

Keen to find out how analysts think Sinotruk (Hong Kong)'s future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

In order to justify its P/E ratio, Sinotruk (Hong Kong) would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 117% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 17% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.0% each year over the next three years. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

In light of this, it's curious that Sinotruk (Hong Kong)'s P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Sinotruk (Hong Kong)'s 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 Sinotruk (Hong Kong) currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Sinotruk (Hong Kong) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.