Subdued Growth No Barrier To AsiaInfo Technologies Limited (HKG:1675) With Shares Advancing 29%

AsiaInfo Technologies Limited (HKG:1675) shareholders have had their patience rewarded with a 29% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 83%.

Following the firm bounce in price, AsiaInfo Technologies' price-to-earnings (or "P/E") ratio of 17.6x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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There hasn't been much to differentiate AsiaInfo Technologies' and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for AsiaInfo Technologies

Keen to find out how analysts think AsiaInfo Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like AsiaInfo Technologies' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.0% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 32% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is not materially different.

In light of this, it's curious that AsiaInfo Technologies' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

AsiaInfo Technologies' P/E is getting right up there since its shares have risen strongly. 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.

Our examination of AsiaInfo Technologies' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware AsiaInfo Technologies is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than AsiaInfo Technologies. 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.