When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 11x, you may consider Fourace Industries Group Holdings Limited (HKG:1455) as a highly attractive investment with its 4.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Our free stock report includes 2 warning signs investors should be aware of before investing in Fourace Industries Group Holdings. Read for free now.Earnings have risen at a steady rate over the last year for Fourace Industries Group Holdings, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.
See our latest analysis for Fourace Industries Group Holdings
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Fourace Industries Group Holdings' to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 26% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 17% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we are not surprised that Fourace Industries Group 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.
What We Can Learn From Fourace Industries Group 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 Fourace Industries Group Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term 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 Fourace Industries Group Holdings (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.
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.