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Wall Street JournalRoiserv Lifestyle Services Co., Ltd. (HKG:2146) Looks Inexpensive But Perhaps Not Attractive Enough
When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may consider Roiserv Lifestyle Services Co., Ltd. (HKG:2146) as a highly attractive investment with its 3.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
For instance, Roiserv Lifestyle Services' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for Roiserv Lifestyle Services
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Roiserv Lifestyle Services would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a frustrating 4.0% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 66% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's an unpleasant look.
With this information, we are not surprised that Roiserv Lifestyle Services is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Roiserv Lifestyle Services revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Roiserv Lifestyle Services is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.
If you're unsure about the strength of Roiserv Lifestyle Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.