Midea Real Estate Holding Limited (HKG:3990) shares have had a horrible month, losing 63% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 66% share price decline.
Although its price has dipped substantially, Midea Real Estate Holding may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.4x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
While the market has experienced earnings growth lately, Midea Real Estate Holding's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Midea Real Estate Holding
Is There Any Growth For Midea Real Estate Holding?
In order to justify its P/E ratio, Midea Real Estate Holding would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. As a result, earnings from three years ago have also fallen 90% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 20% per year as estimated by the five analysts watching the company. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
With this information, we find it odd that Midea Real Estate Holding is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Key Takeaway
The softening of Midea Real Estate Holding's shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Midea Real Estate Holding currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You should always think about risks. Case in point, we've spotted 5 warning signs for Midea Real Estate Holding you should be aware of, and 2 of them don't sit too well with us.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.