When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 12x, you may consider Deyun Holding Ltd. (HKG:1440) as an attractive investment with its 8.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
For example, consider that Deyun Holding's financial performance has been poor lately as it's earnings have been in decline. 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.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Any Growth For Deyun Holding?
The only time you'd be truly comfortable seeing a P/E as low as Deyun Holding's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 4.1% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 135% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Deyun Holding's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Bottom Line On Deyun Holding'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.
Our examination of Deyun Holding revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Deyun Holding (at least 1 which is significant), and understanding them should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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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