It's not a stretch to say that China Ludao Technology Company Limited's (HKG:2023) price-to-earnings (or "P/E") ratio of 8.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
China Ludao Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
View our latest analysis for China Ludao Technology
How Is China Ludao Technology's Growth Trending?
The only time you'd be comfortable seeing a P/E like China Ludao Technology's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 79% last year. The strong recent performance means it was also able to grow EPS by 52% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.
With this information, we find it interesting that China Ludao Technology is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Bottom Line On China Ludao Technology's P/E
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.
We've established that China Ludao Technology currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, 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.
We don't want to rain on the parade too much, but we did also find 2 warning signs for China Ludao Technology (1 shouldn't be ignored!) that you need to be mindful of.
Of course, you might also be able to find a better stock than China Ludao Technology. 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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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.