Improved Earnings Required Before Far East Horizon Limited (HKG:3360) Shares Find Their Feet

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may consider Far East Horizon Limited (HKG:3360) as an attractive investment with its 8x 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 limited.

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Far East Horizon hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Far East Horizon

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

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Far East Horizon's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. As a result, earnings from three years ago have also fallen 41% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 5.0% per annum during the coming three years according to the ten analysts following the company. With the market predicted to deliver 14% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Far East Horizon is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Far East Horizon's P/E

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 Far East Horizon maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Far East Horizon (1 is potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Far East Horizon, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.