Dream International Limited (HKG:1126) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.
In spite of the firm bounce in price, Dream International's price-to-earnings (or "P/E") ratio of 5.6x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 11x and even P/E's above 23x 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 limited.
As an illustration, earnings have deteriorated at Dream International over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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 Dream International
What Are Growth Metrics Telling Us About The Low P/E?
Dream International's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform 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 11%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 282% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Dream International's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From Dream International's P/E?
The latest share price surge wasn't enough to lift Dream International's P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Dream International currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Dream International that you should be aware of.
Of course, you might also be able to find a better stock than Dream International. 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.