When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Bosideng International Holdings Limited (HKG:3998) as a stock to avoid entirely with its 15.4x 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 lofty.
Bosideng International Holdings certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.
SEHK:3998 Price to Earnings Ratio vs Industry February 1st 2024
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Is There Enough Growth For Bosideng International Holdings?
The only time you'd be truly comfortable seeing a P/E as steep as Bosideng International Holdings' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.3% last year. This was backed up an excellent period prior to see EPS up by 70% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. That's shaping up to be similar to the 16% per annum growth forecast for the broader market.
With this information, we find it interesting that Bosideng International Holdings is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Bosideng International Holdings' P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Bosideng International Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Bosideng International Holdings 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.