When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may consider Binhai Investment Company Limited (HKG:2886) as an attractive investment with its 5.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Binhai Investment has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable 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 Binhai Investment
How Is Binhai Investment's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Binhai Investment's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 10%. Still, lamentably EPS has fallen 45% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's understandable that Binhai Investment's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Binhai Investment's P/E
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.
As we suspected, our examination of Binhai Investment revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Binhai Investment (1 makes us a bit uncomfortable!) that you need to be mindful of.
If you're unsure about the strength of Binhai Investment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.