Royal Deluxe Holdings Limited (HKG:3789) shareholders that were waiting for something to happen have been dealt a blow with a 29% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.
In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Royal Deluxe Holdings' P/E ratio of 8.1x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
For example, consider that Royal Deluxe Holdings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for Royal Deluxe Holdings
How Is Royal Deluxe Holdings' Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Royal Deluxe Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 72% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's somewhat alarming that Royal Deluxe Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Bottom Line On Royal Deluxe Holdings' P/E
With its share price falling into a hole, the P/E for Royal Deluxe Holdings looks quite average now. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Royal Deluxe Holdings revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Royal Deluxe Holdings (of which 1 makes us a bit uncomfortable!) you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.