Earnings Not Telling The Story For EPI (Holdings) Limited (HKG:689) After Shares Rise 55%

Despite an already strong run, EPI (Holdings) Limited (HKG:689) shares have been powering on, with a gain of 55% 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 11% over that time.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about EPI (Holdings)'s P/E ratio of 12.2x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 12x. 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.

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With earnings growth that's exceedingly strong of late, EPI (Holdings) has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for EPI (Holdings)

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like EPI (Holdings)'s is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that EPI (Holdings)'s P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From EPI (Holdings)'s P/E?

Its shares have lifted substantially and now EPI (Holdings)'s P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that EPI (Holdings) currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for EPI (Holdings) that we have uncovered.

You might be able to find a better investment than EPI (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.