There wouldn't be many who think NetDragon Websoft Holdings Limited's (HKG:777) price-to-earnings (or "P/E") ratio of 11.4x is worth a mention when the median P/E in Hong Kong is similar at about 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, NetDragon Websoft Holdings' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for NetDragon Websoft Holdings

Keen to find out how analysts think NetDragon Websoft Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For NetDragon Websoft Holdings?

The only time you'd be comfortable seeing a P/E like NetDragon Websoft Holdings' is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. This means it has also seen a slide in earnings over the longer-term as EPS is down 55% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 36% each year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

With this information, we find it interesting that NetDragon Websoft Holdings is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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 NetDragon Websoft Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 2 warning signs for NetDragon Websoft Holdings that you need to take into consideration.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.