TS Wonders Holding Limited (HKG:1767) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 40% share price drop.
Even after such a large drop in price, TS Wonders Holding may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.9x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 4x 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 lofty.
As an illustration, earnings have deteriorated at TS Wonders Holding over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for TS Wonders Holding
Does Growth Match The High P/E?
TS Wonders Holding's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better 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 62%. Still, the latest three year period has seen an excellent 144% overall rise in EPS, in spite of its unsatisfying short-term performance. 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 16% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that TS Wonders Holding's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
What We Can Learn From TS Wonders Holding's P/E?
There's still some solid strength behind TS Wonders Holding's P/E, if not its share price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of TS Wonders Holding revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
Plus, you should also learn about these 2 warning signs we've spotted with TS Wonders Holding.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.