Earnings Not Telling The Story For FAR International Holdings Group Company Limited (HKG:2516)
When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider FAR International Holdings Group Company Limited (HKG:2516) as a stock to potentially avoid with its 12.2x 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.
Recent times have been quite advantageous for FAR International Holdings Group as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for FAR International Holdings Group
Does Growth Match The High P/E?
In order to justify its P/E ratio, FAR International Holdings Group would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 99% drop in EPS in aggregate. 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 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that FAR International Holdings Group's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of FAR International Holdings Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
We don't want to rain on the parade too much, but we did also find 3 warning signs for FAR International Holdings Group (1 is potentially serious!) that you need to be mindful of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
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About SEHK:2516
FAR International Holdings Group
An investment holding company, provides cross-border e-commerce logistics services in Mainland China, Hong Kong, the United States, the United Kingdom, and internationally.
Adequate balance sheet with acceptable track record.
