MMG Limited's (HKG:1208) 25% Jump Shows Its Popularity With Investors

MMG Limited (HKG:1208) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 125% in the last year.

Following the firm bounce in price, MMG's price-to-earnings (or "P/E") ratio of 20.3x 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 12x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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MMG certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for MMG

Keen to find out how analysts think MMG's future stacks up against the industry? In that case, our free report is a great place to start.

How Is MMG's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 301% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 1.2% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that MMG's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From MMG's P/E?

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

As we suspected, our examination of MMG'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for MMG you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.