With a median price-to-earnings (or "P/E") ratio of close to 10x in Hong Kong, you could be forgiven for feeling indifferent about CITIC Telecom International Holdings Limited's (HKG:1883) P/E ratio of 8.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent earnings growth for CITIC Telecom International Holdings has been in line with the market. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.
How Is CITIC Telecom International Holdings' Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like CITIC Telecom International Holdings' to be considered reasonable.
Retrospectively, the last year delivered a decent 3.1% gain to the company's bottom line. EPS has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 1.7% per year over the next three years. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader market.
In light of this, it's curious that CITIC Telecom International Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Final Word
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.
Our examination of CITIC Telecom International Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for CITIC Telecom International Holdings with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on CITIC Telecom International Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.