Greentown Management Holdings Company Limited's (HKG:9979) price-to-earnings (or "P/E") ratio of 6x 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 22x 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.
With earnings growth that's superior to most other companies of late, Greentown Management Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for Greentown Management Holdings
What Are Growth Metrics Telling Us About The Low P/E?
Greentown Management 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 16% last year. Pleasingly, EPS has also lifted 74% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 3.4% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.
In light of this, it's understandable that Greentown Management Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Greentown Management Holdings' P/E?
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.
As we suspected, our examination of Greentown Management 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Greentown Management Holdings (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.
Of course, you might also be able to find a better stock than Greentown Management 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.