When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider K2 F&B Holdings Limited (HKG:2108) as a highly attractive investment with its 3x 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 limited.
The earnings growth achieved at K2 F&B Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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.
Check out our latest analysis for K2 F&B Holdings
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 K2 F&B Holdings' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. The strong recent performance means it was also able to grow EPS by 234% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that K2 F&B Holdings' 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.
What We Can Learn From K2 F&B Holdings' P/E?
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 K2 F&B Holdings 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.
Having said that, be aware K2 F&B Holdings is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.
You might be able to find a better investment than K2 F&B Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.