Take Care Before Jumping Onto Prosperous Industrial (Holdings) Limited (HKG:1731) Even Though It's 26% Cheaper

The Prosperous Industrial (Holdings) Limited (HKG:1731) share price has fared very poorly over the last month, falling by a substantial 26%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may still consider Prosperous Industrial (Holdings) as a highly attractive investment with its 3.2x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Prosperous Industrial (Holdings) as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Prosperous Industrial (Holdings)

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Prosperous Industrial (Holdings)'s earnings, revenue and cash flow.

How Is Prosperous Industrial (Holdings)'s Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Prosperous Industrial (Holdings)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 101% last year. Pleasingly, EPS has also lifted 665% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Prosperous Industrial (Holdings) is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Shares in Prosperous Industrial (Holdings) have plummeted and its P/E is now low enough to touch the ground. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Prosperous Industrial (Holdings) 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.

Having said that, be aware Prosperous Industrial (Holdings) is showing 2 warning signs in our investment analysis, you should know about.

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 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.