Lemtech Holdings Co., Limited's (TWSE:4912) 31% Share Price Surge Not Quite Adding Up

Despite an already strong run, Lemtech Holdings Co., Limited (TWSE:4912) shares have been powering on, with a gain of 31% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 78% in the last year.

Although its price has surged higher, it's still not a stretch to say that Lemtech Holdings' price-to-earnings (or "P/E") ratio of 20.8x right now seems quite "middle-of-the-road" compared to the market in Taiwan, where the median P/E ratio is around 21x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Lemtech Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 Lemtech Holdings

Although there are no analyst estimates available for Lemtech Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Lemtech Holdings' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 151%. Still, incredibly EPS has fallen 29% in total from three years ago, which is quite disappointing. 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 25% shows it's an unpleasant look.

With this information, we find it concerning that Lemtech Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Key Takeaway

Its shares have lifted substantially and now Lemtech Holdings' P/E is also back up to the market median. 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.

Our examination of Lemtech Holdings revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place 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 2 warning signs for Lemtech Holdings (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Lemtech Holdings' 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.