Skyworth Group Limited's (HKG:751) Shares Not Telling The Full Story

It's not a stretch to say that Skyworth Group Limited's (HKG:751) price-to-earnings (or "P/E") ratio of 11.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 12x. 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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Skyworth Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Is There Some Growth For Skyworth Group?

There's an inherent assumption that a company should be matching the market for P/E ratios like Skyworth Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 56%. This means it has also seen a slide in earnings over the longer-term as EPS is down 59% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 70% as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 19% growth forecast for the broader market.

In light of this, it's curious that Skyworth Group's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

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 Skyworth Group currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for Skyworth Group you should be aware of.

Of course, you might also be able to find a better stock than Skyworth Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.