With a price-to-earnings (or "P/E") ratio of 4.7x CCID Consulting Company Limited (HKG:8235) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 22x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Recent times have been quite advantageous for CCID Consulting as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Does CCID Consulting's P/E Ratio Compare To Its Industry Peers?
An inspection of average P/E's throughout CCID Consulting's industry may help to explain its particularly low P/E ratio. It turns out the IT industry in general has a P/E ratio significantly higher than the market, as the graphic below shows. So we'd say there is practically no merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the IT industry's current setting, most of its constituents' P/E's would be expected to be raised up greatly. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on CCID Consulting's earnings, revenue and cash flow.
Is There Any Growth For CCID Consulting?
CCID Consulting's 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 73% gain to the company's bottom line. Pleasingly, EPS has also lifted 503% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.5% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that CCID Consulting's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
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 CCID Consulting currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Having said that, be aware CCID Consulting is showing 2 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on CCID Consulting, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. 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.
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