Some Confidence Is Lacking In China Resources Beer (Holdings) Company Limited's (HKG:291) P/E
There wouldn't be many who think China Resources Beer (Holdings) Company Limited's (HKG:291) price-to-earnings (or "P/E") ratio of 13.3x is worth a mention when the median P/E in Hong Kong is similar at about 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
China Resources Beer (Holdings) 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 not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for China Resources Beer (Holdings)
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like China Resources Beer (Holdings)'s is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 42% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 3.9% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 13% each year growth forecast for the broader market.
With this information, we find it interesting that China Resources Beer (Holdings) is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On China Resources Beer (Holdings)'s 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.
We've established that China Resources Beer (Holdings) currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 1 warning sign for China Resources Beer (Holdings) that you need to take into consideration.
If you're unsure about the strength of China Resources Beer (Holdings)'s 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.