Topsports International Holdings Limited (HKG:6110) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

Topsports International Holdings Limited (HKG:6110) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 41% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Topsports International Holdings' P/E ratio of 9.9x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. 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.

Recent times have been advantageous for Topsports International Holdings as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Topsports International Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Topsports International Holdings.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Topsports International Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.9% per year over the next three years. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Topsports International Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Topsports International Holdings' plummeting stock price has brought its P/E right back to the rest of the market. 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.

Our examination of Topsports International Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Topsports International Holdings you should know about.

You might be able to find a better investment than Topsports International Holdings. 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).

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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.

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