Morimatsu International Holdings Company Limited's (HKG:2155) Shares Climb 32% But Its Business Is Yet to Catch Up

The Morimatsu International Holdings Company Limited (HKG:2155) share price has done very well over the last month, posting an excellent gain of 32%. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Morimatsu International Holdings' P/E ratio of 10.1x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We've discovered 1 warning sign about Morimatsu International Holdings. View them for free.

Morimatsu International Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Morimatsu International Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 42% in total over the last three years. 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.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 12% per annum over the next three years. With the market predicted to deliver 15% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that Morimatsu International Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Morimatsu International Holdings' P/E?

Its shares have lifted substantially and now Morimatsu International Holdings' P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Morimatsu International Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Morimatsu International Holdings that you need to take into consideration.

If you're unsure about the strength of Morimatsu International Holdings' 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.