Benign Growth For Mingfa Group (International) Co., Ltd. (HKG:846) Underpins Its Share Price

Mingfa Group (International) Co., Ltd.'s (HKG:846) price-to-earnings (or "P/E") ratio of 3.2x 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 12x and even P/E's above 26x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Mingfa Group (International) as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, 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.

View our latest analysis for Mingfa Group (International)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Mingfa Group (International) will help you shine a light on its historical performance.

Is There Any Growth For Mingfa Group (International)?

Mingfa Group (International)'s P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 123%. The latest three year period has also seen an excellent 30% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Mingfa Group (International)'s P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Mingfa Group (International) revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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 rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Mingfa Group (International) that we have uncovered.

If these risks are making you reconsider your opinion on Mingfa Group (International), explore our interactive list of high quality stocks to get an idea of what else is out there.

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