CLP Holdings Limited's (HKG:2) price-to-earnings (or "P/E") ratio of 14.4x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x and even P/E's below 6x 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 as high as it is.
We've discovered 2 warning signs about CLP Holdings. View them for free.With earnings growth that's superior to most other companies of late, CLP Holdings 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.
See our latest analysis for CLP Holdings
How Is CLP Holdings' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as CLP Holdings' is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 76% last year. Pleasingly, EPS has also lifted 38% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 4.0% per year as estimated by the nine analysts watching the company. With the market predicted to deliver 15% growth per year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that CLP Holdings is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
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.
Our examination of CLP Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
We don't want to rain on the parade too much, but we did also find 2 warning signs for CLP Holdings that you need to be mindful of.
You might be able to find a better investment than CLP 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.