Earnings Tell The Story For BOE Varitronix Limited (HKG:710) As Its Stock Soars 29%

BOE Varitronix Limited (HKG:710) shares have continued their recent momentum with a 29% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 7.8% isn't as impressive.

After such a large jump in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider BOE Varitronix as a stock to potentially avoid with its 12.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

BOE Varitronix hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for BOE Varitronix

Want the full picture on analyst estimates for the company? Then our free report on BOE Varitronix will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like BOE Varitronix's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. Even so, admirably EPS has lifted 184% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 16% per annum over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that BOE Varitronix'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 Key Takeaway

The large bounce in BOE Varitronix's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that BOE Varitronix maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for BOE Varitronix with six simple checks on some of these key factors.

You might be able to find a better investment than BOE Varitronix. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.