Be Friends Holding Limited (HKG:1450) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 23% share price drop.

In spite of the heavy fall in price, there still wouldn't be many who think Be Friends Holding's price-to-earnings (or "P/E") ratio of 8.3x is worth a mention when the median P/E in Hong Kong is similar at about 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.

Recent times have been advantageous for Be Friends Holding as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Be Friends Holding's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 145% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 38% each year during the coming three years according to the one analyst following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader market.

In light of this, it's curious that Be Friends Holding's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Be Friends Holding's P/E?

Be Friends Holding's plummeting stock price has brought its P/E right back to the rest of the market. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Be Friends Holding currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Be Friends Holding with six simple checks.

If these risks are making you reconsider your opinion on Be Friends Holding, 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.