Madison Holdings Group Limited (HKG:8057) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month.    For any long-term shareholders, the last month ends a year to forget by locking in a 75% share price decline.  

Although its price has dipped substantially, Madison Holdings Group's price-to-earnings (or "P/E") ratio of 23.3x might still make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common.  However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.  

For example, consider that Madison Holdings Group's financial performance has been pretty ordinary lately as earnings growth is non-existent.   One possibility is that the P/E is high because investors think the benign earnings growth will improve 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 Madison Holdings Group

SEHK:8057 Price to Earnings Ratio vs Industry June 8th 2023

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Madison Holdings Group's earnings, revenue and cash flow.  

Does Growth Match The High P/E?  

There's an inherent assumption that a company should far outperform the market for P/E ratios like Madison Holdings Group's to be considered reasonable.  

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago.   Likewise, not much has changed from three years ago as earnings have been stuck during that whole time.  So it seems apparent to us that the company has struggled to grow earnings meaningfully over that time.  

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Madison Holdings Group is trading at a P/E higher than the market.  It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects.  There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.  

What We Can Learn From Madison Holdings Group's P/E?

A significant share price dive has done very little to deflate Madison Holdings Group's very lofty P/E.      It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Madison Holdings Group currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast.  Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long.  If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Madison Holdings Group (2 shouldn't be ignored!) that you need to be mindful of.  

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.