The Hong Kong and China Gas Company Limited's (HKG:3) Shareholders Might Be Looking For Exit

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider The Hong Kong and China Gas Company Limited (HKG:3) as a stock to avoid entirely with its 23.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Hong Kong and China Gas' earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Hong Kong and China Gas' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Hong Kong and China Gas' to be considered reasonable.

Retrospectively, the last year delivered a decent 2.5% gain to the company's bottom line. The latest three year period has also seen an excellent 36% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.2% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is noticeably more attractive.

With this information, we find it concerning that Hong Kong and China Gas is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Hong Kong and China Gas' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Hong Kong and China Gas.

If these risks are making you reconsider your opinion on Hong Kong and China Gas, 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. 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.