Lichen China Limited's (NASDAQ:LICN) Shares Bounce 26% But Its Business Still Trails The Market

Lichen China Limited (NASDAQ:LICN) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

In spite of the firm bounce in price, Lichen China may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.4x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, Lichen China has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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 out of favour.

View our latest analysis for Lichen China

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

How Is Lichen China's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Lichen China's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 48% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 15% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Lichen China is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Lichen China's P/E?

The latest share price surge wasn't enough to lift Lichen China's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Lichen China revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Lichen China (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.