The Best Pacific International Holdings Limited (HKG:2111) share price has done very well over the last month, posting an excellent gain of 48%. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.
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 Best Pacific International Holdings as an attractive investment with its 4.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Best Pacific International Holdings as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 underperform the market for P/E ratios like Best Pacific International Holdings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 16%. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 7.5% over the next year. That's shaping up to be materially lower than the 22% growth forecast for the broader market.
In light of this, it's understandable that Best Pacific International Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
What We Can Learn From Best Pacific International Holdings' P/E?
The latest share price surge wasn't enough to lift Best Pacific International Holdings' P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Best Pacific International Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 1 warning sign for Best Pacific International Holdings you should be aware of.
If you're unsure about the strength of Best Pacific International Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.