When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Smoore International Holdings Limited (HKG:6969) as a stock to avoid entirely with its 59.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
We check all companies for important risks. See what we found for Smoore International Holdings in our free report.While the market has experienced earnings growth lately, Smoore International Holdings' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Smoore International Holdings
How Is Smoore International Holdings' Growth Trending?
In order to justify its P/E ratio, Smoore International Holdings would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. As a result, earnings from three years ago have also fallen 76% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 24% each year as estimated by the eleven analysts watching the company. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Smoore International Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
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.
We've established that Smoore International Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Smoore International Holdings with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than Smoore International 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.