Those holding Kingmaker Footwear Holdings Limited (HKG:1170) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios.    Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.  

Following the firm bounce in price, Kingmaker Footwear Holdings' price-to-earnings (or "P/E") ratio of 11.6x 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.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.  

With earnings growth that's exceedingly strong of late, Kingmaker Footwear Holdings has been doing very well.   The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future.  If not, then existing shareholders might be a little nervous about the viability of the share price.    

SEHK:1170 Price to Earnings Ratio vs Industry February 21st 2024

Although there are no analyst estimates available for Kingmaker Footwear Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

Does Growth Match The High P/E?  

Kingmaker Footwear Holdings' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.  

Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line.   Still, EPS has barely risen at all from three years ago in total, which is not ideal.  So it appears to us that the company has had a mixed result in terms of growing earnings over that time.  

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Kingmaker Footwear Holdings' P/E sits above the majority of other companies.  Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price.  There's a good chance existing shareholders are 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 Kingmaker Footwear Holdings' P/E?

Kingmaker Footwear Holdings shares have received a push in the right direction, but its P/E is elevated too.      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.

We've established that Kingmaker Footwear Holdings currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast.  Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long.  If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Kingmaker Footwear Holdings that you need to be mindful of.  

If you're unsure about the strength of Kingmaker Footwear Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.