TCL Electronics Holdings Limited (HKG:1070) shareholders have had their patience rewarded with a 41% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 77%.
Since its price has surged higher, TCL Electronics Holdings' price-to-earnings (or "P/E") ratio of 13.8x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x and even P/E's below 6x 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 as high as it is.
With earnings growth that's superior to most other companies of late, TCL Electronics Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for TCL Electronics Holdings
Is There Enough Growth For TCL Electronics Holdings?
There's an inherent assumption that a company should outperform the market for P/E ratios like TCL Electronics Holdings' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 136% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 42% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the six analysts following the company. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.
In light of this, it's understandable that TCL Electronics Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From TCL Electronics Holdings' P/E?
The large bounce in TCL Electronics Holdings' shares has lifted the company's P/E to a fairly high level. 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.
As we suspected, our examination of TCL Electronics Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for TCL Electronics Holdings you should be aware of.
Of course, you might also be able to find a better stock than TCL Electronics Holdings. 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.