With a price-to-earnings (or "P/E") ratio of 15.3x Greentown Service Group Co. Ltd. (HKG:2869) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Greentown Service Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Greentown Service Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Greentown Service Group.

Is There Enough Growth For Greentown Service Group?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Greentown Service Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. However, this wasn't enough as the latest three year period has seen an unpleasant 20% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the analysts watching the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Greentown Service Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Greentown Service Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Greentown Service Group is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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