Infinity Development Holdings Company Limited's (HKG:640) price-to-earnings (or "P/E") ratio of 6.7x might make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Infinity Development Holdings has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
Check out our latest analysis for Infinity Development Holdings
Is There Any Growth For Infinity Development Holdings?
In order to justify its P/E ratio, Infinity Development Holdings would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings growth, the company posted a worthy increase of 7.6%. EPS has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Infinity Development Holdings is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
What We Can Learn From Infinity Development Holdings' P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Infinity Development Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 2 warning signs for Infinity Development Holdings 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.