With a price-to-earnings (or “P/E”) ratio of 6x Wah Sun Handbags International Holdings Limited (HKG:2683) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 12x and even P/E’s higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
Wah Sun Handbags International Holdings certainly has been doing a great job lately as it’s been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn’t eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Wah Sun Handbags International Holdings
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What Are Growth Metrics Telling Us About The Low P/E?
Wah Sun Handbags International Holdings’ P/E ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 57%. Pleasingly, EPS has also lifted 52% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially higher than the company’s recent medium-term annualised growth rates.
With this information, we can see why Wah Sun Handbags International Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
As we suspected, our examination of Wah Sun Handbags International Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Plus, you should also learn about these 2 warning signs we’ve spotted with Wah Sun Handbags International Holdings .
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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Discover if Wah Sun Handbags International Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
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