360 Ludashi Holdings Limited's (HKG:3601) Business And Shares Still Trailing The Market

360 Ludashi Holdings Limited's (HKG:3601) price-to-earnings (or "P/E") ratio of 2.6x might make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Earnings have risen firmly for 360 Ludashi Holdings recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for 360 Ludashi Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on 360 Ludashi Holdings will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, 360 Ludashi Holdings would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Still, lamentably EPS has fallen 40% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that 360 Ludashi Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From 360 Ludashi Holdings' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that 360 Ludashi Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - 360 Ludashi Holdings has 3 warning signs (and 2 which are concerning) we think you should know about.

Of course, you might also be able to find a better stock than 360 Ludashi Holdings. 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.