Despite an already strong run, Regina Miracle International (Holdings) Limited (HKG:2199) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.2% isn't as attractive.
Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Regina Miracle International (Holdings) as a stock to avoid entirely with its 19.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Regina Miracle International (Holdings)'s earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Regina Miracle International (Holdings)'s Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Regina Miracle International (Holdings)'s is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 69% decrease to the company's bottom line. Even so, admirably EPS has lifted 53% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Looking ahead now, EPS is anticipated to climb by 40% each year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Regina Miracle International (Holdings) 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.
What We Can Learn From Regina Miracle International (Holdings)'s P/E?
The strong share price surge has got Regina Miracle International (Holdings)'s P/E rushing to great heights as well. 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.
We've established that Regina Miracle International (Holdings) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we've spotted 3 warning signs for Regina Miracle International (Holdings) you should be aware of, and 1 of them is a bit unpleasant.
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.