ESR Group Limited (HKG:1821) shares have had a really impressive month, gaining 54% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 4.9% isn't as attractive.
Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider ESR Group as a stock to avoid entirely with its 32.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
ESR Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Is There Enough Growth For ESR Group?
In order to justify its P/E ratio, ESR Group would need to produce outstanding growth well in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 64%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 52% per annum as estimated by the ten analysts watching the company. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.
With this information, we can see why ESR Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On ESR Group's P/E
ESR Group's P/E is flying high just like its stock has during the last month. 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.
As we suspected, our examination of ESR Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 4 warning signs for ESR Group (of which 1 can't be ignored!) you should know about.
You might be able to find a better investment than ESR Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.