It's Down 28% But Midea Real Estate Holding Limited (HKG:3990) Could Be Riskier Than It Looks

Unfortunately for some shareholders, the Midea Real Estate Holding Limited (HKG:3990) share price has dived 28% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 45% share price drop.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Midea Real Estate Holding's P/E ratio of 9x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, Midea Real Estate Holding'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. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for Midea Real Estate Holding

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Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Midea Real Estate Holding's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 90% 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 20% each year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.

In light of this, it's curious that Midea Real Estate Holding's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Midea Real Estate Holding's P/E

With its share price falling into a hole, the P/E for Midea Real Estate Holding looks quite average now. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Midea Real Estate Holding's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You should always think about risks. Case in point, we've spotted 5 warning signs for Midea Real Estate Holding you should be aware of, and 3 of them are a bit unpleasant.

If you're unsure about the strength of Midea Real Estate 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.