A.Plus Group Holdings Limited (HKG:1841) shareholders won't be pleased to see that the share price has had a very rough month, dropping 30% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 36% in that time.
Even after such a large drop in price, A.Plus Group Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
As an illustration, earnings have deteriorated at A.Plus Group Holdings over the last year, which is not ideal at all. 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 A.Plus Group Holdings
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as A.Plus Group Holdings' is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 57%. The last three years don't look nice either as the company has shrunk EPS by 69% in aggregate. 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 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we are not surprised that A.Plus Group Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
A.Plus Group Holdings' P/E has taken a tumble along with its share price. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that A.Plus Group Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. 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.
Before you settle on your opinion, we've discovered 3 warning signs for A.Plus Group Holdings (2 are potentially serious!) that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.