With a price-to-earnings (or "P/E") ratio of 7x Midea Real Estate Holding Limited (HKG:3990) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 19x 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 limited.
With earnings that are retreating more than the market's of late, Midea Real Estate Holding has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Midea Real Estate Holding
Is There Any Growth For Midea Real Estate Holding?
There's an inherent assumption that a company should underperform the market for P/E ratios like Midea Real Estate Holding's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 72%. The last three years don't look nice either as the company has shrunk EPS by 82% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 24% per year over the next three years. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.
With this information, we find it odd that Midea Real Estate Holding is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
What We Can Learn From Midea Real Estate Holding's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Midea Real Estate Holding's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook 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, but investors seem to think future earnings could see a lot of volatility.
Having said that, be aware Midea Real Estate Holding is showing 3 warning signs in our investment analysis, you should know about.
Of course, you might also be able to find a better stock than Midea Real Estate Holding. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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.