Wai Chi Holdings Company Limited (HKG:1305) Surges 27% Yet Its Low P/E Is No Reason For Excitement

Wai Chi Holdings Company Limited (HKG:1305) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 4.5% isn't as impressive.

Even after such a large jump in price, Wai Chi Holdings' price-to-earnings (or "P/E") ratio of 4.4x might still 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 23x 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.

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The earnings growth achieved at Wai Chi Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

Check out our latest analysis for Wai Chi Holdings

Although there are no analyst estimates available for Wai Chi Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Wai Chi Holdings' Growth Trending?

Wai Chi Holdings' 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.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, incredibly EPS has fallen 11% in total from three years ago, which is quite disappointing. 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 18% 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 Wai Chi Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Wai Chi Holdings' P/E?

Shares in Wai Chi Holdings are going to need a lot more upward momentum to get the company's P/E out of its slump. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Wai Chi 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Wai Chi Holdings you should know about.

Of course, you might also be able to find a better stock than Wai Chi 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.