With a price-to-earnings (or "P/E") ratio of 17.7x Tingyi (Cayman Islands) Holding Corp. (HKG:322) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings growth that's superior to most other companies of late, Tingyi (Cayman Islands) Holding has been doing relatively well. 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.
View our latest analysis for Tingyi (Cayman Islands) Holding
How Is Tingyi (Cayman Islands) Holding's Growth Trending?
Tingyi (Cayman Islands) Holding's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 9.6% in total over the last three years. 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 11% each year as estimated by the analysts watching the company. With the market predicted to deliver 12% growth per year, the company is positioned for a comparable earnings result.
With this information, we find it interesting that Tingyi (Cayman Islands) Holding is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Bottom Line On Tingyi (Cayman Islands) Holding's P/E
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Tingyi (Cayman Islands) Holding currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Tingyi (Cayman Islands) Holding that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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