Those holding Flowing Cloud Technology Ltd (HKG:6610) shares would be relieved that the share price has rebounded 47% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 62% share price decline over the last year.
Even after such a large jump in price, Flowing Cloud Technology may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.8x, since 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 so limited.
For instance, Flowing Cloud Technology's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
See our latest analysis for Flowing Cloud Technology
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Flowing Cloud Technology's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 1.8% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 198% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that Flowing Cloud Technology's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
Even after such a strong price move, Flowing Cloud Technology's P/E still trails the rest of the market significantly. 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 Flowing Cloud Technology 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. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
Before you settle on your opinion, we've discovered 2 warning signs for Flowing Cloud Technology that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.