To the annoyance of some shareholders, Fullwealth International Group Holdings Limited (HKG:1034) shares are down a considerable 32% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 68% share price decline.
In spite of the heavy fall in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider Fullwealth International Group Holdings as a stock to potentially avoid with its 14.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For example, consider that Fullwealth International Group Holdings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Fullwealth International Group Holdings
What Are Growth Metrics Telling Us About The High P/E?
Fullwealth International Group Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.3%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 901% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.
In light of this, it's understandable that Fullwealth International Group Holdings' 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.
The Final Word
Despite the recent share price weakness, Fullwealth International Group Holdings' P/E remains higher than most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Fullwealth International Group Holdings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Fullwealth International Group Holdings that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.