With a price-to-earnings (or "P/E") ratio of 3.9x First Pacific Company Limited (HKG:142) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 19x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, First Pacific has been doing relatively well. 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 far underperform the market for P/E ratios like First Pacific's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 29%. Pleasingly, EPS has also lifted 287% 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.

Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the one analyst watching the company. That's shaping up to be similar to the 15% per annum growth forecast for the broader market.

In light of this, it's peculiar that First Pacific's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

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 First Pacific currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for First Pacific (of which 1 is concerning!) you should know about.

Of course, you might also be able to find a better stock than First Pacific. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.