LHN Limited's (SGX:41O) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Despite an already strong run, LHN Limited (SGX:41O) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 91% in the last year.

Although its price has surged higher, given about half the companies in Singapore have price-to-earnings ratios (or "P/E's") above 13x, you may still consider LHN as a highly attractive investment with its 5.6x P/E ratio. However, the P/E might be quite low 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, LHN has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for LHN

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

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

LHN's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 203% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 8.9% per annum during the coming three years according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 9.8% each year, which paints a poor picture.

With this information, we are not surprised that LHN is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Even after such a strong price move, LHN's P/E still trails the rest of the market significantly. 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 LHN maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for LHN (2 don't sit too well with us) you should be aware of.

If these risks are making you reconsider your opinion on LHN, 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.