Even With A 29% Surge, Cautious Investors Are Not Rewarding Hong Leong Asia Ltd.'s (SGX:H22) Performance Completely

Hong Leong Asia Ltd. (SGX:H22) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 157% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Hong Leong Asia's P/E ratio of 13.1x, since the median price-to-earnings (or "P/E") ratio in Singapore is also close to 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Hong Leong Asia certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Hong Leong Asia

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

Is There Some Growth For Hong Leong Asia?

There's an inherent assumption that a company should be matching the market for P/E ratios like Hong Leong Asia's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. The strong recent performance means it was also able to grow EPS by 46% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 8.9% each year, which is noticeably less attractive.

In light of this, it's curious that Hong Leong Asia's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Its shares have lifted substantially and now Hong Leong Asia's P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hong Leong Asia currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hong Leong Asia that you should be aware of.

You might be able to find a better investment than Hong Leong Asia. 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.