DIT Group Limited’s (HKG:726) Popularity With Investors Under Threat - Simply Wall St
When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) below 10x, you may consider DIT Group Limited (HKG:726) as a stock to avoid entirely with its 25.2x 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.
DIT Group certainly has been doing a great job lately as it’s been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough 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 DIT Group
Does Growth Match The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like DIT Group’s to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 304% last year. However, the latest three year period hasn’t been as great in aggregate as it didn’t manage to provide any growth at all. Accordingly, shareholders probably wouldn’t have been overly satisfied with the unstable medium-term growth rates.
Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 9.8% shows it’s noticeably less attractive on an annualised basis.
With this information, we find it concerning that DIT Group is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On DIT Group’s P/E
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 DIT Group currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn’t likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we’ve discovered 2 warning signs for DIT Group (1 makes us a bit uncomfortable!) that you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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This article by Simply Wall St is general in nature. 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.
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