When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Tsim Sha Tsui Properties Limited (HKG:247) as a stock to potentially avoid with its 11.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
It looks like earnings growth has deserted Tsim Sha Tsui Properties recently, which is not something to boast about. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Tsim Sha Tsui Properties
How Is Tsim Sha Tsui Properties' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as Tsim Sha Tsui Properties' is when the company's growth is on track to outshine the market.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 224% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably more attractive on an annualised basis.
In light of this, it's understandable that Tsim Sha Tsui Properties' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
What We Can Learn From Tsim Sha Tsui Properties' P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Tsim Sha Tsui Properties revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
You need to take note of risks, for example - Tsim Sha Tsui Properties has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.
If you're unsure about the strength of Tsim Sha Tsui Properties' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.