There wouldn't be many who think Sun Hung Kai Properties Limited's (HKG:16) price-to-earnings (or "P/E") ratio of 11.7x is worth a mention when the median P/E in Hong Kong is similar at about 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Sun Hung Kai Properties hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
See our latest analysis for Sun Hung Kai Properties
Is There Some Growth For Sun Hung Kai Properties?
There's an inherent assumption that a company should be matching the market for P/E ratios like Sun Hung Kai Properties' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. This means it has also seen a slide in earnings over the longer-term as EPS is down 29% in total over the last three years. 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 13% per annum as estimated by the analysts watching the company. With the market predicted to deliver 12% growth per year, the company is positioned for a comparable earnings result.
With this information, we can see why Sun Hung Kai Properties is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
The Bottom Line On Sun Hung Kai Properties' P/E
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 Sun Hung Kai Properties maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.
Having said that, be aware Sun Hung Kai Properties is showing 1 warning sign in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Sun Hung Kai Properties, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.