Clifford Modern Living Holdings Limited (HKG:3686) shares have continued their recent momentum with a 41% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.
Even after such a large jump in price, it's still not a stretch to say that Clifford Modern Living Holdings' price-to-earnings (or "P/E") ratio of 7.9x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
For instance, Clifford Modern Living Holdings' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Is There Some Growth For Clifford Modern Living Holdings?
There's an inherent assumption that a company should be matching the market for P/E ratios like Clifford Modern Living Holdings' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 9.3% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 33% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Clifford Modern Living Holdings is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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.
What We Can Learn From Clifford Modern Living Holdings' P/E?
Its shares have lifted substantially and now Clifford Modern Living Holdings' P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Clifford Modern Living 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Clifford Modern Living Holdings that you should be aware of.
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.
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.