First Service Holding Limited's (HKG:2107) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider First Service Holding Limited (HKG:2107) as an attractive investment with its 6.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, First Service Holding's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for First Service Holding

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on First Service Holding's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a frustrating 1.3% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 67% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 21% 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 First Service Holding's 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. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On First Service Holding's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of First Service Holding revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

Before you take the next step, you should know about the 4 warning signs for First Service Holding (1 is potentially serious!) that we have uncovered.

If you're unsure about the strength of First Service Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.