Improved Earnings Required Before 361 Degrees International Limited (HKG:1361) Shares Find Their Feet

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 12x, you may consider 361 Degrees International Limited (HKG:1361) as a highly attractive investment with its 4.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, 361 Degrees International has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for 361 Degrees International

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Is There Any Growth For 361 Degrees International?

In order to justify its P/E ratio, 361 Degrees International would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a decent 9.0% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 18% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 11% per annum over the next three years. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

With this information, we can see why 361 Degrees International is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On 361 Degrees International's P/E

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.

We've established that 361 Degrees International maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for 361 Degrees International with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than 361 Degrees International. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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