When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Budweiser Brewing Company APAC Limited (HKG:1876) as a stock to avoid entirely with its 16.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Budweiser Brewing Company APAC could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for Budweiser Brewing Company APAC
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Budweiser Brewing Company APAC's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 16% per annum over the next three years. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
With this information, we can see why Budweiser Brewing Company APAC is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
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 Budweiser Brewing Company APAC maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. 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. Take a look at our free balance sheet analysis for Budweiser Brewing Company APAC with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Budweiser Brewing Company APAC, 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.