TCL Electronics Holdings Limited (HKG:1070) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 142% in the last year.
Following the firm bounce in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider TCL Electronics Holdings as a stock to potentially avoid with its 13.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
TCL Electronics Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for TCL Electronics Holdings
Is There Enough Growth For TCL Electronics Holdings?
In order to justify its P/E ratio, TCL Electronics Holdings would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 143%. However, this wasn't enough as the latest three year period has seen a very unpleasant 56% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.
With this information, we can see why TCL Electronics Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
The large bounce in TCL Electronics Holdings' shares has lifted the company's P/E to a fairly high level. 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.
As we suspected, our examination of TCL Electronics Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for TCL Electronics Holdings with six simple checks will allow you to discover any risks that could be an issue.
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.