To the annoyance of some shareholders, Momentum Financial Holdings Limited (HKG:1152) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 72% share price decline.
Following the heavy fall in price, Momentum Financial Holdings' price-to-earnings (or "P/E") ratio of 2.4x might 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 17x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Momentum Financial Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Momentum Financial Holdings
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Momentum Financial Holdings' is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow EPS by 351% 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.
With this information, we find it odd that Momentum Financial Holdings 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
Momentum Financial Holdings' P/E looks about as weak as its stock price lately. 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.
We've established that Momentum Financial Holdings currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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.
You need to take note of risks, for example - Momentum Financial Holdings has 4 warning signs (and 3 which can't be ignored) we think you should know about.
If you're unsure about the strength of Momentum Financial Holdings' 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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