Earnings Tell The Story For Futu Holdings Limited (NASDAQ:FUTU) As Its Stock Soars 25%

Futu Holdings Limited (NASDAQ:FUTU) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last month tops off a massive increase of 114% in the last year.

Following the firm bounce in price, Futu Holdings' price-to-earnings (or "P/E") ratio of 24.2x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 11x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Futu Holdings has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Futu Holdings

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

Is There Enough Growth For Futu Holdings?

In order to justify its P/E ratio, Futu Holdings would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 2.7% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 66% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 42% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 15%, which is noticeably less attractive.

In light of this, it's understandable that Futu Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Futu Holdings' shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of Futu Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Futu Holdings with six simple checks will allow you to discover any risks that could be an issue.

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