Optimistic Investors Push Rimbaco Group Global Limited (HKG:1953) Shares Up 93% But Growth Is Lacking

Rimbaco Group Global Limited (HKG:1953) shares have continued their recent momentum with a 93% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 75% in the last year.

After such a large jump in price, Rimbaco Group Global may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at Rimbaco Group Global over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Rimbaco Group Global

Does Growth Match The High P/E?

In order to justify its P/E ratio, Rimbaco Group Global would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 42%. Even so, admirably EPS has lifted 42% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Rimbaco Group Global's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Key Takeaway

The strong share price surge has got Rimbaco Group Global's P/E rushing to great heights as well. 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.

Our examination of Rimbaco Group Global revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Rimbaco Group Global (2 are a bit unpleasant!) that we have uncovered.

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

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