Lee & Man Paper Manufacturing Limited's (HKG:2314) price-to-earnings (or "P/E") ratio of 12.4x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 8x and even P/E's below 4x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
Lee & Man Paper Manufacturing has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for Lee & Man Paper Manufacturing
SEHK:2314 Price to Earnings Ratio vs Industry January 23rd 2024
Want the full picture on analyst estimates for the company? Then our free report on Lee & Man Paper Manufacturing will help you uncover what's on the horizon.
Is There Enough Growth For Lee & Man Paper Manufacturing?
There's an inherent assumption that a company should outperform the market for P/E ratios like Lee & Man Paper Manufacturing's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 65%. This means it has also seen a slide in earnings over the longer-term as EPS is down 76% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 36% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15% each year, which is noticeably less attractive.
With this information, we can see why Lee & Man Paper Manufacturing is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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 Lee & Man Paper Manufacturing's 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. Unless these conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Lee & Man Paper Manufacturing (1 can't be ignored!) that you need to be mindful of.
If these risks are making you reconsider your opinion on Lee & Man Paper Manufacturing, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.