When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider EEKA Fashion Holdings Limited (HKG:3709) as a stock to avoid entirely with its 15.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for EEKA Fashion Holdings as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for EEKA Fashion Holdings
Does Growth Match The High P/E?
In order to justify its P/E ratio, EEKA Fashion Holdings would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 4.1% gain to the company's bottom line. Pleasingly, EPS has also lifted 49% in aggregate from three years ago, partly 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.
Looking ahead now, EPS is anticipated to climb by 26% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 15% per year, which is noticeably less attractive.
With this information, we can see why EEKA Fashion Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On EEKA Fashion Holdings' P/E
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.
We've established that EEKA Fashion Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for EEKA Fashion Holdings with six simple checks.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.