ECI Technology Holdings Limited's (HKG:8013) 29% Price Boost Is Out Of Tune With Earnings

The ECI Technology Holdings Limited (HKG:8013) share price has done very well over the last month, posting an excellent gain of 29%. Notwithstanding the latest gain, the annual share price return of 6.9% isn't as impressive.

In spite of the firm bounce in price, there still wouldn't be many who think ECI Technology Holdings' price-to-earnings (or "P/E") ratio of 14.8x is worth a mention when the median P/E in Hong Kong is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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For example, consider that ECI Technology Holdings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for ECI Technology Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ECI Technology Holdings will help you shine a light on its historical performance.

Is There Some Growth For ECI Technology Holdings?

ECI Technology Holdings' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 19%. Even so, admirably EPS has lifted 47% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that ECI Technology Holdings' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now ECI Technology Holdings' P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of ECI Technology Holdings revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for ECI Technology Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of ECI Technology Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.