East Buy Holding Limited's (HKG:1797) P/E Is Still On The Mark Following 26% Share Price Bounce

Despite an already strong run, East Buy Holding Limited (HKG:1797) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

After such a large jump in price, East Buy Holding's price-to-earnings (or "P/E") ratio of 67.6x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x 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 so lofty.

East Buy Holding could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for East Buy Holding

If you'd like to see what analysts are forecasting going forward, you should check out our free report on East Buy Holding.

Is There Enough Growth For East Buy Holding?

In order to justify its P/E ratio, East Buy Holding would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 69% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

With this information, we can see why East Buy Holding is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got East Buy Holding's P/E rushing to great heights as well. 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.

As we suspected, our examination of East Buy Holding's 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 need to take note of risks, for example - East Buy Holding has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If you're unsure about the strength of East Buy Holding's 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.