Why Investors Shouldn't Be Surprised By LifeTech Scientific Corporation's (HKG:1302) 26% Share Price Surge

Explore LifeTech Scientific's Fair Values from the Community and select yours

Despite an already strong run, LifeTech Scientific Corporation (HKG:1302) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider LifeTech Scientific as a stock to avoid entirely with its 41.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, LifeTech Scientific's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for LifeTech Scientific

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

Is There Enough Growth For LifeTech Scientific?

There's an inherent assumption that a company should far outperform the market for P/E ratios like LifeTech Scientific's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. The last three years don't look nice either as the company has shrunk EPS by 29% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 77% during the coming year according to the lone analyst following the company. With the market only predicted to deliver 21%, the company is positioned for a stronger earnings result.

With this information, we can see why LifeTech Scientific is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in LifeTech Scientific have built up some good momentum lately, which has really inflated its P/E. 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 LifeTech Scientific'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. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for LifeTech Scientific with six simple checks on some of these key factors.

You might be able to find a better investment than LifeTech Scientific. 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.