Insufficient Growth At Runhua Living Service Group Holdings Limited (HKG:2455) Hampers Share Price

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Runhua Living Service Group Holdings Limited (HKG:2455) as an attractive investment with its 7.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

As an illustration, earnings have deteriorated at Runhua Living Service Group Holdings over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Runhua Living Service Group Holdings

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What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Runhua Living Service Group Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 9.3% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's an unpleasant look.

In light of this, it's understandable that Runhua Living Service Group Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Runhua Living Service Group 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 Runhua Living Service Group Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Runhua Living Service Group Holdings (of which 1 is significant!) you should know about.

If these risks are making you reconsider your opinion on Runhua Living Service Group Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.