Bairong Inc.'s (HKG:6608) 26% Cheaper Price Remains In Tune With Earnings

The Bairong Inc. (HKG:6608) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 15% share price drop.

In spite of the heavy fall in price, Bairong's price-to-earnings (or "P/E") ratio of 13.3x might still make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. 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.

With earnings growth that's superior to most other companies of late, Bairong 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 Bairong

Want the full picture on analyst estimates for the company? Then our free report on Bairong will help you uncover what's on the horizon.

Is There Enough Growth For Bairong?

The only time you'd be truly comfortable seeing a P/E as high as Bairong's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. 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 23% per year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 14% each year growth forecast for the broader market.

With this information, we can see why Bairong is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Bairong's P/E?

There's still some solid strength behind Bairong's P/E, if not its share price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bairong 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Bairong with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Bairong. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.