Market Participants Recognise TravelSky Technology Limited's (HKG:696) Earnings

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider TravelSky Technology Limited (HKG:696) as a stock to avoid entirely with its 24.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

TravelSky Technology 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for TravelSky Technology

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How Is TravelSky Technology's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 92% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 77% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 32% per year over the next three years. That's shaping up to be materially higher than the 16% each year growth forecast for the broader market.

In light of this, it's understandable that TravelSky Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

We've established that TravelSky Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for TravelSky Technology with six simple checks.

You might be able to find a better investment than TravelSky Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.