Pinning Down Hengan International Group Company Limited's (HKG:1044) P/E Is Difficult Right Now

It's not a stretch to say that Hengan International Group Company Limited's (HKG:1044) price-to-earnings (or "P/E") ratio of 13.1x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

While the market has experienced earnings growth lately, Hengan International Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Hengan International Group

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

Is There Some Growth For Hengan International Group?

The only time you'd be comfortable seeing a P/E like Hengan International Group's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. As a result, earnings from three years ago have also fallen 16% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.5% each year as estimated by the analysts watching the company. With the market predicted to deliver 14% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Hengan International Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Hengan International Group'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.

Our examination of Hengan International Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Hengan International Group has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Hengan International Group. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.