With a price-to-earnings (or "P/E") ratio of 5.8x Cinda International Holdings Limited (HKG:111) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
For instance, Cinda International Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.free report on Cinda International Holdings' earnings, revenue and cash flow.
Is There Any Growth For Cinda International Holdings?
The only time you'd be truly comfortable seeing a P/E as low as Cinda International Holdings' is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
It's interesting to note that the rest of the market is similarly expected to grow by 9.7% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Cinda International Holdings' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.
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 Cinda International Holdings currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Cinda International Holdings (1 is significant!) that you should be aware of before investing here.
Of course, you might also be able to find a better stock than Cinda International Holdings. 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.
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This article by Simply Wall St is general in nature. 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.
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