Despite an already strong run, Lingbao Gold Group Company Ltd. (HKG:3330) shares have been powering on, with a gain of 32% in the last thirty days. The last 30 days bring the annual gain to a very sharp 84%.
Even after such a large jump in price, it's still not a stretch to say that Lingbao Gold Group's price-to-earnings (or "P/E") ratio of 9.2x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 9x. 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.
For example, consider that Lingbao Gold Group's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Lingbao Gold Group
How Is Lingbao Gold Group's Growth Trending?
The only time you'd be comfortable seeing a P/E like Lingbao Gold Group's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's curious that Lingbao Gold Group's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
What We Can Learn From Lingbao Gold Group's P/E?
Its shares have lifted substantially and now Lingbao Gold Group's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Lingbao Gold Group revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely 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.
You need to take note of risks, for example - Lingbao Gold Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.
You might be able to find a better investment than Lingbao Gold Group. 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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