Despite an already strong run, Kinetic Development Group Limited (HKG:1277) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 175% in the last year.
Even after such a large jump in price, Kinetic Development Group's price-to-earnings (or "P/E") ratio of 4.3x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With earnings growth that's exceedingly strong of late, Kinetic Development Group has been doing very well. One possibility is that the P/E is low because investors think this strong 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.
View our latest analysis for Kinetic Development Group
What Are Growth Metrics Telling Us About The Low P/E?
Kinetic Development Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year. The latest three year period has also seen an excellent 87% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's about the same on an annualised basis.
With this information, we find it odd that Kinetic Development Group is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.
The Key Takeaway
Kinetic Development Group's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Kinetic Development Group currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.
Before you take the next step, you should know about the 1 warning sign for Kinetic Development Group that we have uncovered.
If you're unsure about the strength of Kinetic Development Group'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.