There’s Reason For Concern Over DIT Group Limited’s (HKG:726) Price - Simply Wall St
With a price-to-earnings (or “P/E”) ratio of 24.3x DIT Group Limited (HKG:726) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E’s lower than 5x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.
Recent times have been quite advantageous for DIT Group as its earnings have been rising very briskly. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for DIT Group
What Are Growth Metrics Telling Us About The High P/E?
The only time you’d be truly comfortable seeing a P/E as steep as DIT Group’s is when the company’s growth is on track to outshine the market decidedly.
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.
Comparing that to the market, which is predicted to deliver 9.9% growth in the next 12 months, the company’s momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it’s alarming that DIT Group’s P/E sits above the majority of other companies. 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. There’s a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
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.
Our examination of DIT Group revealed its three-year earnings trends aren’t impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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 3 warning signs for DIT Group (1 doesn’t sit too well with us!) 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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