Why We're Not Concerned Yet About AsiaInfo Technologies Limited's (HKG:1675) 27% Share Price Plunge

AsiaInfo Technologies Limited (HKG:1675) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 62% in the last year.

Although its price has dipped substantially, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may still consider AsiaInfo Technologies as a stock to potentially avoid with its 18.5x P/E ratio. 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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AsiaInfo Technologies certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for AsiaInfo Technologies

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

How Is AsiaInfo Technologies' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as AsiaInfo Technologies' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 60% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 29% per year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 14% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that AsiaInfo Technologies' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Despite the recent share price weakness, AsiaInfo Technologies' P/E remains higher than most other companies. 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.

As we suspected, our examination of AsiaInfo Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - AsiaInfo Technologies has 1 warning sign we think you should be aware of.

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.