When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider The United Laboratories International Holdings Limited (HKG:3933) as an attractive investment with its 6.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, United Laboratories International Holdings has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for United Laboratories International Holdings
Does Growth Match The Low P/E?
United Laboratories International Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The strong recent performance means it was also able to grow EPS by 162% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 4.3% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% per annum, which is noticeably more attractive.
With this information, we can see why United Laboratories International Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On United Laboratories International Holdings' 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.
As we suspected, our examination of United Laboratories International Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You always need to take note of risks, for example - United Laboratories International Holdings has 1 warning sign we think you should be aware of.
Of course, you might also be able to find a better stock than United Laboratories International Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.