Market Participants Recognise FIT Hon Teng Limited's (HKG:6088) Earnings Pushing Shares 28% Higher

Explore FIT Hon Teng's Fair Values from the Community and select yours

FIT Hon Teng Limited (HKG:6088) shares have continued their recent momentum with a 28% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

After such a large jump in price, FIT Hon Teng's price-to-earnings (or "P/E") ratio of 17.9x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. 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.

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Recent times have been advantageous for FIT Hon Teng as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, FIT Hon Teng would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. As a result, it also grew EPS by 6.3% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 27% each year during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that FIT Hon Teng's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

FIT Hon Teng's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that FIT Hon Teng maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for FIT Hon Teng that you need to take into consideration.

Of course, you might also be able to find a better stock than FIT Hon Teng. 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.