It's not a stretch to say that Harbin Electric Company Limited's (HKG:1133) price-to-earnings (or "P/E") ratio of 8.8x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Harbin Electric certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.
SEHK:1133 Price to Earnings Ratio vs Industry June 30th 2024 Want the full picture on analyst estimates for the company? Then our free report on Harbin Electric will help you uncover what's on the horizon.
Does Growth Match The P/E?
In order to justify its P/E ratio, Harbin Electric would need to produce growth that's similar to the market.
Retrospectively, the last year delivered an exceptional 440% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 32% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.
With this information, we find it interesting that Harbin Electric is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
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 Harbin Electric currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Harbin Electric that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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