Subdued Growth No Barrier To Lam Soon (Hong Kong) Limited (HKG:411) With Shares Advancing 27%

Lam Soon (Hong Kong) Limited (HKG:411) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

In spite of the firm bounce in price, 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. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Recent times have been quite advantageous for Lam Soon (Hong Kong) as its earnings have been rising very briskly. 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.

Check out our latest analysis for Lam Soon (Hong Kong)

What Are Growth Metrics Telling Us About The P/E?

Lam Soon (Hong Kong)'s P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 51%. However, this wasn't enough as the latest three year period has seen a very unpleasant 10% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's an unpleasant look.

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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Lam Soon (Hong Kong)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Lam Soon (Hong Kong) currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Lam Soon (Hong Kong) you should be aware of, and 1 of them can't be ignored.

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.