Newborn Town Inc.'s (HKG:9911) Shares Bounce 26% But Its Business Still Trails The Market

Newborn Town Inc. (HKG:9911) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Even after such a large jump in price, Newborn Town may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.1x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 18x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Newborn Town certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Newborn Town

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Newborn Town.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Newborn Town's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 293%. Pleasingly, EPS has also lifted 1,003% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 4.1% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

In light of this, it's understandable that Newborn Town's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Newborn Town's P/E?

Newborn Town's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Newborn Town maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Newborn Town (1 is concerning!) that you should be aware of.

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.