To the annoyance of some shareholders, Flowing Cloud Technology Ltd (HKG:6610) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 70% loss during that time.
In spite of the heavy fall in price, Flowing Cloud Technology's price-to-earnings (or "P/E") ratio of 2.6x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 9x and even P/E's above 18x are quite common. 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 example, consider that Flowing Cloud Technology's financial performance has been poor lately as its earnings have been in decline. 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.
Check out our latest analysis for Flowing Cloud Technology
How Is Flowing Cloud Technology's Growth Trending?
In order to justify its P/E ratio, Flowing Cloud Technology would need to produce anemic growth that's substantially trailing the market.
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. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 19% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that Flowing Cloud Technology is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Final Word
Flowing Cloud Technology's P/E looks about as weak as its stock price lately. 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.
Our examination of Flowing Cloud Technology revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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.
Having said that, be aware Flowing Cloud Technology is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.
Of course, you might also be able to find a better stock than Flowing Cloud Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.