Lygend Resources & Technology Co., Ltd. (HKG:2245) shareholders have had their patience rewarded with a 67% share price jump in the last month. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.
Although its price has surged higher, Lygend Resources & Technology's price-to-earnings (or "P/E") ratio of 6x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 12x and even P/E's above 23x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings growth that's exceedingly strong of late, Lygend Resources & Technology has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.
View our latest analysis for Lygend Resources & Technology
Is There Any Growth For Lygend Resources & Technology?
Lygend Resources & Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 69% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 4.8% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
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 understandable that Lygend Resources & Technology's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
What We Can Learn From Lygend Resources & Technology's P/E?
Lygend Resources & Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Lygend Resources & Technology maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Lygend Resources & Technology (1 is significant) you should be aware of.
If you're unsure about the strength of Lygend Resources & Technology'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.