Risks To Shareholder Returns Are Elevated At These Prices For Flat Glass Group Co., Ltd. (HKG:6865)

It's not a stretch to say that Flat Glass Group Co., Ltd.'s (HKG:6865) price-to-earnings (or "P/E") ratio of 11.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Flat Glass Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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 Flat Glass Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Flat Glass Group.

Does Growth Match The P/E?

In order to justify its P/E ratio, Flat Glass Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 25% in total over the last three years. 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 year should bring diminished returns, with earnings decreasing 3.5% as estimated by the analysts watching the company. With the market predicted to deliver 22% growth , that's a disappointing outcome.

With this information, we find it concerning that Flat Glass Group is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Flat Glass Group's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Flat Glass Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Flat Glass Group that you need to be mindful of.

You might be able to find a better investment than Flat Glass Group. 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.