Even With A 26% Surge, Cautious Investors Are Not Rewarding Baguio Green Group Limited's (HKG:1397) Performance Completely

Baguio Green Group Limited (HKG:1397) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 77% in the last year.

Even after such a large jump in price, Baguio Green Group's price-to-earnings (or "P/E") ratio of 5.5x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 13x and even P/E's above 25x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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With earnings growth that's exceedingly strong of late, Baguio Green Group 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.

See our latest analysis for Baguio Green Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Baguio Green Group will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Baguio Green Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. Pleasingly, EPS has also lifted 381% in aggregate from three years ago, thanks to the last 12 months of growth. 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 20% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Baguio Green Group's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Shares in Baguio Green Group are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of Baguio Green Group revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Baguio Green Group that you need to be mindful of.

If these risks are making you reconsider your opinion on Baguio Green Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.