What Lee's Pharmaceutical Holdings Limited's (HKG:950) P/E Is Not Telling You

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider Lee's Pharmaceutical Holdings Limited (HKG:950) as a stock to potentially avoid with its 14.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's exceedingly strong of late, Lee's Pharmaceutical Holdings has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Lee's Pharmaceutical Holdings

Although there are no analyst estimates available for Lee's Pharmaceutical Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

Lee's Pharmaceutical Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 97% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Lee's Pharmaceutical Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Lee's Pharmaceutical Holdings' P/E

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's Pharmaceutical Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Lee's Pharmaceutical Holdings that we have uncovered.

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

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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.