First Pacific Company Limited (HKG:142) Shares Fly 28% But Investors Aren't Buying For Growth

First Pacific Company Limited (HKG:142) shareholders have had their patience rewarded with a 28% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.

Even after such a large jump in price, First Pacific may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.1x, since almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 23x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Our free stock report includes 2 warning signs investors should be aware of before investing in First Pacific. Read for free now.

Recent times have been advantageous for First Pacific as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for First Pacific

Want the full picture on analyst estimates for the company? Then our free report on First Pacific will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, First Pacific would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The strong recent performance means it was also able to grow EPS by 149% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 9.3% per year over the next three years. That's shaping up to be materially lower than the 15% per annum growth forecast for the broader market.

In light of this, it's understandable that First Pacific's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Even after such a strong price move, First Pacific's P/E still trails the rest of the market significantly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of First Pacific's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for First Pacific (1 is concerning!) that you need to take into consideration.

Of course, you might also be able to find a better stock than First Pacific. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.