There's No Escaping Lee & Man Chemical Company Limited's (HKG:746) Muted Earnings Despite A 25% Share Price Rise
Despite an already strong run, Lee & Man Chemical Company Limited (HKG:746) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.
Even after such a large jump in price, Lee & Man Chemical may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.8x, since almost half of all companies in Hong Kong have P/E ratios greater than 13x and even P/E's higher than 29x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Lee & Man Chemical has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.
View our latest analysis for Lee & Man Chemical
Is There Any Growth For Lee & Man Chemical?
The only time you'd be truly comfortable seeing a P/E as low as Lee & Man Chemical's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a decent 6.1% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 64% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's understandable that Lee & Man Chemical's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Lee & Man Chemical's P/E
The latest share price surge wasn't enough to lift Lee & Man Chemical's P/E close 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 Lee & Man Chemical maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
There are also other vital risk factors to consider and we've discovered 2 warning signs for Lee & Man Chemical (1 is concerning!) that you should be aware of before investing here.
If you're unsure about the strength of Lee & Man Chemical'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.