Despite an already strong run, E-Commodities Holdings Limited (HKG:1733) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 34%.

Although its price has surged higher, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 9x, you may still consider E-Commodities Holdings as a highly attractive investment with its 2.7x 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 example, consider that E-Commodities Holdings' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like E-Commodities Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's bottom line. Even so, admirably EPS has lifted 547% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that E-Commodities Holdings' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On E-Commodities Holdings' P/E

Shares in E-Commodities Holdings are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

We've established that E-Commodities Holdings currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware E-Commodities Holdings is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of E-Commodities Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.