Stock Analysis

East Buy Holding Limited's (HKG:1797) 27% Cheaper Price Remains In Tune With Earnings

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East Buy Holding Limited (HKG:1797) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 816% in the last year.

In spite of the heavy fall in price, East Buy Holding's price-to-earnings (or "P/E") ratio of 52.7x might still make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 8x and even P/E's below 4x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

East Buy Holding certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for East Buy Holding

SEHK:1797 Price Based on Past Earnings March 19th 2023
Keen to find out how analysts think East Buy Holding's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like East Buy Holding's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 99%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 40% per annum over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.

With this information, we can see why East Buy Holding is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On East Buy Holding's P/E

East Buy Holding's shares may have retreated, but its P/E is still flying high. 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 East Buy Holding maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for East Buy Holding (1 makes us a bit uncomfortable!) that you should be aware of.

Of course, you might also be able to find a better stock than East Buy Holding. 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.

Valuation is complex, but we're helping make it simple.

Find out whether East Buy Holding is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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