To the annoyance of some shareholders, Heng Hup Holdings Limited (HKG:1891) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The recent drop has obliterated the annual return, with the share price now down 8.1% over that longer period.
Although its price has dipped substantially, Heng Hup Holdings' price-to-earnings (or "P/E") ratio of 2.6x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 12x and even P/E's above 24x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Heng Hup Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.
View our latest analysis for Heng Hup Holdings
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Heng Hup Holdings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 199%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's an unpleasant look.
With this information, we are not surprised that Heng Hup Holdings is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
Having almost fallen off a cliff, Heng Hup Holdings' share price has pulled its P/E way down as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Heng Hup Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for Heng Hup Holdings that we have uncovered.
You might be able to find a better investment than Heng Hup Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.