Lisi Group (Holdings) Limited (HKG:526) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The last month tops off a massive increase of 139% in the last year.
Although its price has surged higher, Lisi Group (Holdings) may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.2x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 17x are not unusual. 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.
Earnings have risen firmly for Lisi Group (Holdings) recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Lisi Group (Holdings)
How Is Lisi Group (Holdings)'s Growth Trending?
In order to justify its P/E ratio, Lisi Group (Holdings) would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Lisi Group (Holdings) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Final Word
Even after such a strong price move, Lisi Group (Holdings)'s P/E still trails the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Lisi Group (Holdings) maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Lisi Group (Holdings) that you should be aware of.
If you're unsure about the strength of Lisi Group (Holdings)'s 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.