It's not a stretch to say that Shenzhen Pagoda Industrial (Group) Corporation Limited's (HKG:2411) price-to-earnings (or "P/E") ratio of 10.1x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Recent times have been advantageous for Shenzhen Pagoda Industrial (Group) as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.
Check out our latest analysis for Shenzhen Pagoda Industrial (Group)
How Is Shenzhen Pagoda Industrial (Group)'s Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Shenzhen Pagoda Industrial (Group)'s to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 6.6%. The latest three year period has also seen an excellent 596% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 6.8% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.
With this information, we find it interesting that Shenzhen Pagoda Industrial (Group) is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From Shenzhen Pagoda Industrial (Group)'s P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Shenzhen Pagoda Industrial (Group)'s analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider and we've discovered 2 warning signs for Shenzhen Pagoda Industrial (Group) (1 doesn't sit too well with us!) that you should be aware of before investing here.
You might be able to find a better investment than Shenzhen Pagoda Industrial (Group). 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com