Risks Still Elevated At These Prices As Hoe Leong Corporation Ltd. (SGX:H20) Shares Dive 50%

Hoe Leong Corporation Ltd. (SGX:H20) shareholders that were waiting for something to happen have been dealt a blow with a 50% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 50% share price decline.

In spite of the heavy fall in price, Hoe Leong's price-to-earnings (or "P/E") ratio of 20.8x might still make it look like a strong sell right now compared to the market in Singapore, 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 so lofty.

Hoe Leong certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Hoe Leong

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 Hoe Leong's earnings, revenue and cash flow.

Is There Enough Growth For Hoe Leong?

The only time you'd be truly comfortable seeing a P/E as steep as Hoe Leong's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 200% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 71% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 14% shows it's an unpleasant look.

In light of this, it's alarming that Hoe Leong's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Hoe Leong's shares may have retreated, but its P/E is still flying high. 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 Hoe Leong currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Hoe Leong (1 doesn't sit too well with us!) that we have uncovered.

If you're unsure about the strength of Hoe Leong's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.