Despite an already strong run, LHT Holdings Limited (SGX:BEI) shares have been powering on, with a gain of 29% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.
Since its price has surged higher, LHT Holdings may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.5x, since almost half of all companies in Singapore have P/E ratios under 11x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For instance, LHT Holdings' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like LHT Holdings' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. Even so, admirably EPS has lifted 50% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's about the same on an annualised basis.
In light of this, it's curious that LHT Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.
What We Can Learn From LHT Holdings' P/E?
The large bounce in LHT 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.
We've established that LHT Holdings currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - LHT Holdings has 2 warning signs we think you should be aware of.
You might be able to find a better investment than LHT Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
