When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may consider Gemdale Properties and Investment Corporation Limited (HKG:535) as a highly attractive investment with its 2.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
For instance, Gemdale Properties and Investment's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
See our latest analysis for Gemdale Properties and Investment
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Gemdale Properties and Investment's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.
With this information, we are not surprised that Gemdale Properties and Investment is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
What We Can Learn From Gemdale Properties and Investment's 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.
As we suspected, our examination of Gemdale Properties and Investment revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Gemdale Properties and Investment (of which 1 makes us a bit uncomfortable!) you should know about.
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.