There's No Escaping KGI Financial Holding Co., Ltd.'s (TWSE:2883) Muted Earnings

KGI Financial Holding Co., Ltd.'s (TWSE:2883) price-to-earnings (or "P/E") ratio of 10.8x 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 22x and even P/E's above 40x are quite common. 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 advantageous for KGI Financial Holding as its earnings have been rising faster 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.

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Is There Any Growth For KGI Financial Holding?

The only time you'd be truly comfortable seeing a P/E as depressed as KGI Financial Holding's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 17% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 4.3% each year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 13% per annum, which is noticeably more attractive.

With this information, we can see why KGI Financial Holding is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that KGI Financial Holding maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Before you take the next step, you should know about the 1 warning sign for KGI Financial Holding that we have uncovered.

If you're unsure about the strength of KGI Financial Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.