Kingboard Laminates Holdings Limited's (HKG:1888) price-to-earnings (or "P/E") ratio of 20.4x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 8x and even P/E's below 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With earnings that are retreating more than the market's of late, Kingboard Laminates Holdings has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Kingboard Laminates Holdings' Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Kingboard Laminates Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 68% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 50% each year during the coming three years according to the two analysts following the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Kingboard Laminates Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
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.
We've established that Kingboard Laminates Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Kingboard Laminates Holdings that you should be aware of.
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.