Even With A 28% Surge, Cautious Investors Are Not Rewarding ICO Group Limited's (HKG:1460) Performance Completely

Despite an already strong run, ICO Group Limited (HKG:1460) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 142% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that ICO Group's price-to-earnings (or "P/E") ratio of 12.5x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 13x. 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 quite advantageous for ICO Group as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for ICO Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ICO Group's earnings, revenue and cash flow.

Is There Some Growth For ICO Group?

The only time you'd be comfortable seeing a P/E like ICO Group's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. Pleasingly, EPS has also lifted 210% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that ICO Group is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

ICO Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that ICO Group currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with ICO Group (at least 1 which is concerning), and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.