With a price-to-earnings (or "P/E") ratio of 14.9x HK Electric Investments and HK Electric Investments Limited (HKG:2638) may be sending bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for HK Electric Investments and HK Electric Investments as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for HK Electric Investments and HK Electric Investments
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like HK Electric Investments and HK Electric Investments' to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.6% last year. The solid recent performance means it was also able to grow EPS by 11% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 3.7% each year over the next three years. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.
In light of this, it's alarming that HK Electric Investments and HK Electric Investments' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of HK Electric Investments and HK Electric Investments' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 2 warning signs for HK Electric Investments and HK Electric Investments (1 is potentially serious!) 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.