Lingbao Gold Group Company Ltd. (HKG:3330) shares have had a really impressive month, gaining 59% after a shaky period beforehand. The annual gain comes to 200% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, Lingbao Gold Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 15.2x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Lingbao Gold Group has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for Lingbao Gold Group
How Is Lingbao Gold Group's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Lingbao Gold Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 22%. Pleasingly, EPS has also lifted 103% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Lingbao Gold Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
What We Can Learn From Lingbao Gold Group's P/E?
Lingbao Gold Group's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Lingbao Gold Group revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
Having said that, be aware Lingbao Gold Group is showing 2 warning signs in our investment analysis, and 1 of those is concerning.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.