VSTECS Holdings Limited's (HKG:856) 29% Share Price Surge Not Quite Adding Up

VSTECS Holdings Limited (HKG:856) shares have continued their recent momentum with a 29% gain in the last month alone. The last month tops off a massive increase of 176% in the last year.

Since its price has surged higher, VSTECS Holdings may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, VSTECS Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for VSTECS Holdings

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

The only time you'd be truly comfortable seeing a P/E as high as VSTECS Holdings' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 16% each year over the next three years. With the market predicted to deliver 15% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that VSTECS Holdings is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On VSTECS Holdings' P/E

VSTECS Holdings shares have received a push in the right direction, but its P/E is elevated too. 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 VSTECS Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for VSTECS Holdings you should know about.

If these risks are making you reconsider your opinion on VSTECS Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.