Potential Upside For Hong Leong Asia Ltd. (SGX:H22) Not Without Risk

Hong Leong Asia Ltd.'s (SGX:H22) price-to-earnings (or "P/E") ratio of 8x might make it look like a buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 11x and even P/E's above 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Hong Leong Asia could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Hong Leong Asia

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

Is There Any Growth For Hong Leong Asia?

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

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 73% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 9.9% per annum as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 5.7% per annum growth forecast for the broader market.

With this information, we find it odd that Hong Leong Asia is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Hong Leong Asia's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Hong Leong Asia's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

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

You might be able to find a better investment than Hong Leong Asia. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (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.

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