Lam Soon (Hong Kong) Limited's (HKG:411) 27% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Lam Soon (Hong Kong) Limited (HKG:411) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 44%.

Although its price has surged higher, there still wouldn't be many who think Lam Soon (Hong Kong)'s price-to-earnings (or "P/E") ratio of 11.7x is worth a mention when the median P/E in Hong Kong is similar at about 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Lam Soon (Hong Kong) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Lam Soon (Hong Kong)

Does Growth Match The P/E?

In order to justify its P/E ratio, Lam Soon (Hong Kong) would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Still, incredibly EPS has fallen 10% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 19% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that Lam Soon (Hong Kong)'s P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Bottom Line On Lam Soon (Hong Kong)'s P/E

Lam Soon (Hong Kong)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Lam Soon (Hong Kong) revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Lam Soon (Hong Kong) (including 1 which is significant).

If these risks are making you reconsider your opinion on Lam Soon (Hong Kong), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.