What Hong Kong Johnson Holdings Co., Ltd.'s (HKG:1955) 32% Share Price Gain Is Not Telling You

Hong Kong Johnson Holdings Co., Ltd. (HKG:1955) shares have continued their recent momentum with a 32% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Hong Kong Johnson Holdings as a stock to avoid entirely with its 19x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've discovered 2 warning signs about Hong Kong Johnson Holdings. View them for free.

Recent times have been quite advantageous for Hong Kong Johnson Holdings as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hong Kong Johnson Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hong Kong Johnson Holdings' earnings, revenue and cash flow.

How Is Hong Kong Johnson Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hong Kong Johnson Holdings' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 169%. Still, incredibly EPS has fallen 90% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 18% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Hong Kong Johnson Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Hong Kong Johnson Holdings' P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Hong Kong Johnson Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Hong Kong Johnson Holdings (1 is potentially serious!) that you should be aware of.

Of course, you might also be able to find a better stock than Hong Kong Johnson 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.