There's Reason For Concern Over JBM (Healthcare) Limited's (HKG:2161) Massive 28% Price Jump

JBM (Healthcare) Limited (HKG:2161) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The annual gain comes to 158% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, you could still be forgiven for feeling indifferent about JBM (Healthcare)'s P/E ratio of 11x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for JBM (Healthcare) as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for JBM (Healthcare)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on JBM (Healthcare).

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like JBM (Healthcare)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 79%. Pleasingly, EPS has also lifted 1,508% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 15% per annum, which is noticeably more attractive.

In light of this, it's curious that JBM (Healthcare)'s P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

JBM (Healthcare)'s stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of JBM (Healthcare)'s analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for JBM (Healthcare) with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on JBM (Healthcare), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.