Cathay Financial Holding Co., Ltd.'s (TPE:2882) Low P/E No Reason For Excitement

Cathay Financial Holding Co., Ltd.'s (TPE:2882) price-to-earnings (or "P/E") ratio of 7.5x might make it look like a strong buy right now compared to the market in Taiwan, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Cathay Financial Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Cathay Financial Holding

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Is There Any Growth For Cathay Financial Holding?

In order to justify its P/E ratio, Cathay Financial Holding would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. EPS has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 8.6% over the next year. With the market predicted to deliver 24% growth , that's a disappointing outcome.

With this information, we are not surprised that Cathay Financial Holding 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Cathay Financial Holding 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 need to take note of risks, for example - Cathay Financial Holding has 2 warning signs (and 1 which is concerning) we think you should know about.

If these risks are making you reconsider your opinion on Cathay Financial Holding, 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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