Galaxy Entertainment Group Limited's (HKG:27) Business Is Trailing The Market But Its Shares Aren't

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider Galaxy Entertainment Group Limited (HKG:27) as a stock to potentially avoid with its 18.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's superior to most other companies of late, Galaxy Entertainment Group has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Galaxy Entertainment Group

Keen to find out how analysts think Galaxy Entertainment Group's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Galaxy Entertainment Group?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 14% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is not materially different.

With this information, we find it interesting that Galaxy Entertainment Group is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Galaxy Entertainment Group's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Galaxy Entertainment Group 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.