Investors Don't See Light At End Of Cathay Pacific Airways Limited's (HKG:293) Tunnel

With a price-to-earnings (or "P/E") ratio of 7.9x Cathay Pacific Airways Limited (HKG:293) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Cathay Pacific Airways certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Cathay Pacific Airways

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

How Is Cathay Pacific Airways' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Cathay Pacific Airways' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 320% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 5.6% per year during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 13% per annum.

With this information, we are not surprised that Cathay Pacific Airways is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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 Cathay Pacific Airways maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

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

You might be able to find a better investment than Cathay Pacific Airways. 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.