Lonking Holdings Limited (HKG:3339) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may consider Lonking Holdings Limited (HKG:3339) as an attractive investment with its 10x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Lonking Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Lonking Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lonking Holdings.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Lonking Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. Pleasingly, EPS has also lifted 149% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.4% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

With this information, we can see why Lonking Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of Lonking Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for Lonking Holdings that you should be aware of.

Of course, you might also be able to find a better stock than Lonking Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.