With a price-to-earnings (or "P/E") ratio of 4.8x Rici Healthcare Holdings Limited (HKG:1526) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 21x 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 limited.
We check all companies for important risks. See what we found for Rici Healthcare Holdings in our free report.As an illustration, earnings have deteriorated at Rici Healthcare Holdings over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
View our latest analysis for Rici Healthcare Holdings
Does Growth Match The Low P/E?
Rici Healthcare Holdings' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. The last three years don't look nice either as the company has shrunk EPS by 15% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 18% 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 Rici Healthcare 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 Bottom Line On Rici Healthcare Holdings' P/E
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.
As we suspected, our examination of Rici Healthcare Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Rici Healthcare Holdings with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Rici Healthcare 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.