Hosken Consolidated Investments Limited (JSE:HCI) Screens Well But There Might Be A Catch

When close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") above 9x, you may consider Hosken Consolidated Investments Limited (JSE:HCI) as an attractive investment with its 5.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Hosken Consolidated Investments certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Hosken Consolidated Investments

Although there are no analyst estimates available for Hosken Consolidated Investments, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Hosken Consolidated Investments?

In order to justify its P/E ratio, Hosken Consolidated Investments would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 110% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 365% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 8.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Hosken Consolidated Investments' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hosken Consolidated Investments currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hosken Consolidated Investments (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Hosken Consolidated Investments, 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.